A new owner or not?
IR has issued a draft interpretation statement titled ‘Income tax – application of the land sale rules to changes to co-ownership, subdivisions, and changes of trustees.’ So, what my title to this article was attempting to allude to (just in case you hadn’t managed to guess for yourself), was whether certain ownership title changes would trigger a disposal under the land sale rules, with the obvious potential consequences (particularly during a bright-line period which could be up to ten years now!)
As the title to the IS suggests, the focus of the commentary is on co-ownership scenarios (predominantly changes from joint tenancy to tenants in common and vice versa), subdivisions and whether there is a disposal event when existing owners receive one of the new titles issued, and the impacts of trustee changes (although I expect most of us already appreciate this scenario due to the ‘single person’ status of trustees, and the IS throws up no surprises in this regard).
The document is 58 pages in length, the initial 33 pages walking you through an understanding of the three transactions being considered, the potential different forms of co-ownership, and the disposal definition – with some case law thrown in for good measure. Then you finally get to what we’re always looking for – the conclusions (although admittedly these are set out of the very beginning in the Summary with accompanying Table 1) – where specific scenarios are discussed, each item then broken into two parts – is there a disposal for land sales purposes? and is the bright-line clock reset as a result of the transfer?
So, the main takeaways from the IS:
- Where your proportionate interest in the land remains the same post the transfer (so for example, two joint tenants with deemed 50/50 interest transfer to 50/50 tenants in common), then no disposal for land sales purposes, however, the bright-line clock does restart (although proposed amendment in current tax Bill to provide rollover relief).
- Change the proportionate interest however, and the person reducing their interest has a disposal taking place which could trigger land sales taxation (this includes scenarios where co-owners are added or removed). Remember in this regard, that even where no consideration changes hands between the owners, section GC 1 applies to deem a market value amount to arise where any disposal would produce income under any of sections CB 6A to CB 15 and CZ 39. The bright-line clock is also reset as a result of the transfer.
- When a person subdivides land and receives all the new titles (same owner), there is no disposal for land sales purposes and nor is the bright-line clock reset due to an existing carve-out exception in the bright-line rules.
- However, naturally if one of the new titles goes to a new owner, there is clearly a disposal and then that persons bright-line clock commences from the date of transfer.
- Now the one that I presently do not agree with, and I will make a submission on, is where there are co-owners who have a defined share in the single title, and each co-owner then gets a new title issued to them which correlates to their original interest in the single title. IR’s draft view is that the co-owner is deemed to have sold the land (that arguably they never had an interest in (I do appreciate the legal niceties but let’s get logical!), to the other two co-owners, with potential taxing consequences (due to s.GC 1). So in IR’s Example 9, three co-owners owning a 1/3rd share in the land, dividing the land into three new titles – each co-owner deemed to have sold 2/3rd of the land to the other two owners. I would suggest that where it is clear that the co-owner had a clearly defined interest in the original land (1/3rd in this example), have then agreed to contribute 1/3rd of the costs to the subdivision project with the pre-agreed outcome with their co-owners that the newly issued title they receive equates to 1/3rd of the original land, then surely the correct outcome from a taxation perspective is that it is akin to a ‘transfer to self’ scenario (the taxpayers proportionate interest in the land has not changed), therefore with no disposal event taking place? Let’s see where this one ends up; and,
- A change of trustees neither amounts to a disposal, nor triggers a restart of the bright-line period.
The deadline for comment on PUB00411, is 9th November 2021.
Interest deductibility rules SOP added to Tax Bill
Being the eternal optimist that I am, I had some misguided notion that once the Government had seen all the negative submissions on their proposed interest deduction limitation rules for residential land, they would run for the hills to hide the proposals in some unchartered cave, never to be seen again.
However, that wishful thinking has certainly been demolished (I was trying to think of a strong descriptive word while still keeping it polite) by the SOP added last week to the latest Tax Bill presently before the House. The proposals still have the green light although somewhat surprisingly with an announced second opportunity for us all to voice concerns to the FEC no later than 9th November, who are due to report back in March 2022 (do I punish myself with a further bout of optimism?).
The key features of the proposals now are:
- The rules would apply to interest incurred on or after 1 October 2021.
- For pre-existing loans relating to property acquired before 27 March 2021, interest denial would be phased at 25% per year over four years.
- Loans drawn down on or after 27 March 2021 would be subject to full limitation from 1 October 2021, unless the property was acquired as a result of an offer made on or before 23 March 2021 that could not be withdrawn before 27 March 2021.
- Property developers would continue deducting interest expenses as incurred.
- New build properties would be exempt from the interest limitation rules.
- Interest deductions would be allowed when a taxable sale of residential property is made.
- I won’t comment too much more at this time, as a more detailed commentary on the SOP is due to be released in two weeks’ time, so post reading that document, I’ll dedicate a more in-depth AWIR article to the nightmare as it continues. Several information sheets were issued with the SOP however, so if you’re in desperate need of some bedtime reading to help you sleep, you can find these on IR’s website here.
Content creators tax issues
If you make some money from creating online content, then IS 21/08 may be just the read for you.
The interpretation statement provides guidance to those involved in the following activities and are fortunate enough to see their bank balances increase as a result:
Posting videos, images, or text on social media platforms such as YouTube
- Instagram and Facebook
- Competing in online gaming competitions
- Streaming game play on platforms such as Twitch, Facebook gaming and YouTube gaming
IR refers to you as being a content creator, and the topics likely to be of most interest to you in understanding your potential New Zealand taxation obligations include:
- Important factors in working out whether amounts are income
- ‘Gifts’ or ‘donations’ can be income
- Non-monetary items (or contra) can be income
- Deductions for expenses and depreciation losses
- Income earned by a New Zealand resident overseas
- Tax withheld by a payer
- Keeping good records
The key considerations for establishing whether the amounts you receive are likely to be income and therefore subject to tax, are the regularity of your receipts, your relationship with the payer and the reason you have been paid an amount.
IS 21/08 has a good level of detail (46 pages), with numerous examples throughout to help explain certain concepts.
Covid-19 variation for GST taxable periods
Essentially an updated variation due to the ongoing impact of the pandemic, with its previous versions being COV 20/03 and COV 20/11.
The updated version COV 21/03, operates for the period 1st October 2021 to 31st March 2022, and again enables a taxpayer presently registered on a six-monthly GST return filing basis to change to a monthly filing period to assist with their cash-flow (only likely relevant therefore if you’re hoping to receive a refund), without having to wait until 1st April 2022 for the monthly filing to take effect. Usually if you applied during the current six-month period, the change to the taxable period would not apply until the first day of the next taxable period. However, COV 21/03 allows you to request a change to become a monthly filer, anytime up until 31st March 2022, and your request will be approved effective 1st October 2021.
Should you elect a change of taxable period in accordance with COV 21/03 however, you must remain a monthly filer until at least 30th September 2022.
This article from the ‘A Week in Review’ newsletter was originally published Monday 4th October 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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