TAX UPDATE 9 Nov 2012
UNINTENDED CONSEQUENCE OF CHCH LAND DISPOSALS
The recent amendments to the land taxation rules, designed to provide relief to affected Christchurch landowners, could in some cases result in a worse outcome for those who come under the ambit of the provisions contained in the Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill.
The future redevelopment of Christchurch was detailed in the 30 July 2012 release of the Christchurch Central Recovery Plan (the plan). Implementation of the plan will require the acquisition of land for anchor projects (a stadium, memorial, convention centre, and various precincts). Although initially CERA will seek voluntary purchases from those affected; in many circumstances they will be utilising their powers of compulsory acquisition.
As the taxation rules governing land disposals do not sympathise with those who make a land disposal involuntarily, the tax rules have been modified to accommodate the Christchurch land sales so that a taxpayer is not unfairly treated when there is a forced sale.
The land taxation rules have the power to treat amounts received for the disposal of land as income in a wide range of circumstances. The proposed changes will include disengaging the 10-year rule and removing or deferring the tax consequences arising under the intention of resale rule, where the taxpayer plans to acquire replacement property in the Christchurch area.
However, in disabling the 10-year sale rule, Parliament have denied any loss being
recognised for the taxpayer. The consequences are particularly significant given the rules determining compensation for landowners – which will be appraised based on market value on the date compulsory acquisition occurs. In many cases, this land value is likely to have fallen from the price originally paid by the landowner.
It is expected that as many as 800 landowners will be affected and may face significant tax consequences. In our view, any loss from sale of land that would have given rise to tax if a profit was made ought to continue to be deductible against the landowner's taxable income. Regrettably, the drafting does not allow for this and fails to create the fair and efficient outcome that Parliament sought to achieve.
How it affects you
If you own property in Christchurch that will be acquired as part of the plan, we suggest you contact your advisor to discuss the tax consequences of sale.
NO SIGNIFICANT TAX CHANGE PROPOSED
The Minister for Revenue, the Hon Peter Dunne, gave the opening address to the New Zealand Institute of Chartered Accountants' annual tax conference in Wellington last week.
Through his address, the Minister noted that New Zealand would best face the current fiscal environment through keeping the broad based low-rate tax approach adopted over the past four years by the present Government. The Minister also stated that the path of higher personal taxes, capital gains taxes, and financial transactions taxes were not the path for New Zealand; commenting that "taxes that were dumb to introduce in the past are likely to still be dumb to introduce in the future."
Perhaps in reaction to submissions earlier this year opposing retrospective application of the new mixed-use asset rules; the Minister clarified that retrospective application dates were not the norm. However, they could be imposed in limited circumstances, including where a significant risk to the tax base exists.
Mixed-use assets were discussed, with the Government deciding that apportionment would be based on a comparison of private to business use. The current bill before Parliament also contemplates rules that apportion company interest deductions potentially across both companies and their shareholders, adding a level of complexity that appears likely to require further revision.
The Government is also seeking to enter an Intergovernmental Agreement with the United States on the Foreign Account Compliance Act (FACTA) requirements. This has been in place in the United States since 2010, and would
require our New Zealand financial institutions (banks, life insurers, managed funds) to enter into agreements with the US Inland Revenue Service to provide details about affairs of US citizens in New Zealand. An intergovernmental agreement would allow the Inland Revenue Department to facilitate this.
Other Developments include increasing cooperation between The Productivity Commissions of Australia and New Zealand; who are expected to release their final report on mutual recognition of franking credits and imputation credits for Government submission by 1 December.
How it affects you
Current Government tax policy is focused on incremental tax base protection, rather than the introduction of new taxes. This will see the wider application of existing tax rules and the removal of "loop holes" as they become apparent over time.
POINTS OF INTEREST…
An Issues Paper specifying changes for taxing the mining of specified minerals has been released today. The Issues Paper proposes the greater alignment of the concessionary mining rules with general tax principles.
New Zealand has signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters in order to reduce tax evasion.
A new Double Tax Agreement between New Zealand and Papua New Guinea was signed this week. The Agreement is not yet in force pending appropriate domestic legislation being passed in each country.
TO THE POINT…
Wherever you see a successful business, someone once made a courageous decision