New Zealand Taxation Law: Analysis of The Neils' Tax Liabilities

This report addresses the taxation issues surrounding Tim Neil and Lacey Neil (the Neils) and their land transactions. The central question is whether the sale of seven lots constitutes a business, and the report analyzes the tax implications if it is deemed a business proposition. It delves into relevant sections of the Income Tax Act 2007 (ITA, 2007), including sections CB1, CB6, CB7, and DA1, to determine the nature of the income (ordinary income vs. capital gains) and the commencement of the business for taxation purposes. The report references key legal precedents such as Anzamco Ltd v Commissioner and others to support its conclusions. The analysis considers the Neils' intentions when acquiring the land, the application of the bright-line test, and the implications of subdividing land. The report concludes that the Neils did not carry out a business, but the transactions were for earning a profit, so the income derived by them would be treated as “Ordinary Income” in their hands and taxable accordingly. The report also confirms the tax liability of “the Neils” with the citation of Statues CB 4 and CB 5.

TAXATION
ISSUE:
1. Should Tim Neil and Lacey Neil (referred to as “the Neils” in this report) be considered
to be in business?
2. If the sale of the seven lots is considered as a business proposition, what are the tax
implications for “the Neils”?
3. When should the commencement of their business be considered for taxation purposes?
4. Will the profits earned by “the Neils” be considered as “Ordinary Incomes” or “Capital
Gains”?
THEORY:
(A) Section YA1 of the Income Tax Act of 2007
(B) Section CB1 of the Income Tax Act of 2007
(C) Section CB 4 of the Income Tax Act of 2007
(D) Section CB 5 of the Income Tax Act of 2007
(E) Section CB 6 of the Income Tax Act of 2007
(F) Section CB 7 of the Income Tax Act of 2007
(G) Section CB 16 A of the Income Tax Act of 2007
(H) Section CB 17 of the Income Tax Act of 2007
(I) Section CB 19 of the Income Tax Act of 2007
(J) Section DA1 of the Income Tax Act of 20071
(K) Anzamco Ltd v Commissioner
(L) Aubrey v Commissioner
(M)Bates v Commissioner
(N) Morrow v Commissioner
(O) Vuleta v Commissioner
(P) Wellington v Commissioner
APPLICATION:
My advice to “the Neils” is broadly based on the derivations which I arrived at from the various
judgements of the learned judges, both from the High Court as well as the Supreme Court of
New Zealand in the cases which I have mentioned above in my Theory Section. I have inferred
1 ird.gov.nz. (n.d.) The Inland Revenue Department of New Zealand. Extracted on 12 October 2017 from
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from these judgements that apart from the directives laid down by the Taxation Laws in the
Income Tax Act of 2007 (ITA, 2007)2, these historical as well as milestone judgements are
equally responsible for making any aspiring learner of the law of the land in understanding
what, when and where do statutes of law need to be applied when arriving at a just remedy for
addressing the grievances of the taxpayers in New Zealand, (CCH New Zealand (ed), 2013). My
detailed advice shall be set in the chronical order of the issues stated above.
1. Issue of Business
This issue is addressed for taxation purposes under Section CB 1 of ITA, 2007 and the
definition given is quoted here –
“CB 1 – Amounts derived from business
Income
(1) An amount that a person derives from a business is income of the person.
Exclusion
(2) Subsection (1) does not apply to an amount that is of a capital nature”. Unquote.
However, in the case of “the Neils”, the following statute, as per (CCH New Zealand Ltd (ed),
2013), is more appropriate and the definition is quoted below –
“CB 6 – Disposal: land acquired for purpose or with intention of disposal
Income
(1) An amount that a person derives from disposing of land is income of the person if they
acquired the land—
(a) for 1 or more purposes that included the purpose of disposing of it:
(b) with 1 or more intentions that included the intention of disposing of it.
“The Neils” had acquired the land for residential purposes, hence the following Exclusions are
applicable and I quote –
(2) Subsection (1) is overridden by the exclusions for residential land in section CB 16 and
for business premises in section CB 19”. Unquote.
I am citing the following statute to make it clear that “the Neils” were not intending to
carry on a business in the trade of land.
Hence, I quote –
“CB 7 – Disposal: land acquired for purposes of business relating to land
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Income
(1) An amount that a person (person A) derives from disposing of land is income of person
A if—
(a) both the following apply:
(i) at the time person A acquired the land they, or an associated person, carried on
a business of dealing in land; and
(ii) person A acquired the land for the purpose of the business; or
(b) both the following apply:
(i) at the time person A acquired the land they, or an associated person, carried on
a business of developing land or dividing land into lots; and
(ii) person A acquired the land for the purpose of the business; or
(c) all the following apply:
(i) at the time person A acquired the land they, or an associated person, carried on
a business of erecting buildings; and
(ii) person A acquired the land for the purpose of the business; and
(iii) before or after acquiring the land person A, or the associated person, made
improvements to it.
Exclusions
(2) Subsection (1) is overridden by the exclusions for residential land in section CB
16 and for business premises in section CB 19. Unquote.
This exclusion clause proves my point, (Scully & Caragata (ed), 2012).
2. Tax Implications
This issue is addressed for taxation purposes under Section DA 1 of ITA, 2007 (Littlewood &
Elliffe (ed), 2017) and the definition given is quoted here –
“DA 1 – General Permission: Nexus with income
(1) A person is allowed a deduction for an amount of expenditure or loss, including an
amount of depreciation loss, to the extent to which the expenditure or loss is—
(a) incurred by them in deriving—
(i) their assessable income; or
(ii) their excluded income; or
(iii) a combination of their assessable income and excluded income; or
(b) incurred by them in the course of carrying on a business for the purpose of deriving—
(i) their assessable income; or
(ii) their excluded income; or
(iii) a combination of their assessable income and excluded income”. Unquote.
3. Start of the implication

This issue is addressed for taxation purposes under Section YA 1 of ITA, 2007 (CCH New
Zealand (ed), 2013) and the definition given is quoted here –
“YA 1 Definition
In this Act, unless the context requires otherwise, 12 month ASAP—
(a) means an agreement for the sale and purchase of property or services (ASAP) for
which an amount paid or payable for property or services is pre-paid (the prepayment)
by reference to the rights date, and the prepayment is paid 12 months or more before
the rights date, except if the prepayment is only—
(i) a payment for progress made on either making or constructing property, or
providing services:
(ii) a deposit for property or services paid within the first 3 months of the ASAP
that, when aggregated with all other deposits paid within those first 3 months,
totals 10% or less of the amount paid or payable for property or services”.
Unquote.
CB 6A – Disposal within 2 years: bright-line test for residential land
Disposal within 2 years
(1) An amount that a person derives, say (Lymer & Hasseldine (ed), 2012), from disposing
of residential land is income of the person, if the bright-line date for the residential land
is within 2 years of—
(a) the date on which the instrument to transfer the land to the person was registered—
(i) under the Land Transfer Act 1952; or
(ii) under foreign laws of a similar nature to the Land Transfer Act 1952, if the land
is outside New Zealand; or
(b) their date of acquisition of the land, if an instrument to transfer the land to the person is
not registered on or before the bright-line date.
4. Ordinary Income or Capital Gains
Start of 2-year period for transfers by registration if trustees change
(2) If the person referred to in subsection (1)(a) or (2)(a) is a trustee of a trust who has been
transferred the land or undivided land from a trustee of the trust, the date on which the
instrument was registered is treated as occurring on—
(a) for subsection (1)(a)—
(i) the earliest date (first date) on which an instrument to transfer the land to a
trustee of the trust was registered under the relevant law referred to in the
subsection, if there has been no intervening transfer to a person who is not a
trustee; or

(ii) the first date following the intervening transfer, if there has been an intervening
transfer to a person who is not a trustee:
(b) for subsection (2)(a)—
(i) the earliest date (the undivided date) on which an instrument to transfer the
undivided land to a trustee of the trust was registered under the relevant law
referred to in the subsection, if there has been no intervening transfer to a
person who is not a trustee; or
(ii) the undivided date following the intervening transfer, if there has been an
intervening transfer to a person who is not a trustee (Lymer & Hasseldine (ed),
2012).
The explanations given in the above three issues (2, 3 & 4) make it clear that “the Neils” did not
carry out a business but the transactions which they carried out for disposal of the land held by
them were indeed for the purpose of earning a profit. Hence, the income derived by them would
be treated as “Ordinary Income” in their hands and taxable accordingly.
5. Tax Liability
Here I am again giving the confirmation, with the citation of Statues CB 4 and CB 5 that “the
Neils” do have a tax liability from the transaction which they carried out through the sale of
their Personal Property, (James, Sawyer & Budak (ed), 2016).
CB 4 – Personal property acquired for purpose of disposal
Any amount, which a person has derived after disposal of its personal property shall be
considered as income of that person in case the property is acquired for the purpose of disposal.
CB 5 – Business of dealing in personal property
Any amount, which a person has derived after disposal of its personal property shall be
considered as income of that person in case it is their business to deal in property of that type.
The following explanation, which is part of the Land Transfer Act of 1952, also confirms that
“the Neils” would be liable for taxation on the income derived from the sale of the subdivided
land, (CCH New Zealand (ed), 2013).
Subdivision
An amount which is derived by a person from disposing of the residential land and which
results because the person has subdivided the undivided land, shall be considered as income of
that person, provided the bright-line date of the residential land is within 2 years of the date on
which the person obtained the instrument to transfer that undivided land under the Land
Transfer Act 1952.
Contingent interest

An amount which is derived by a person from disposal of a freehold residential land, which has
been acquired as a result of a land development or subdivision, shall be income provided the
bright-line date of the freehold estate lies within 2 years of acquiring the interest in the land.
CONCLUSION
Apart from the explanations provided above, which have proved beyond doubt the tax liability
of “the Neils”, I would also like to mention the following statutes of the ITA, 2007 in support of
my discussion, (CCH New Zealand Ltd (ed), 2013).
1. Section CB 16A explains that the meaning of bright-line date, for the disposal of any
residential land is –
(a) the earliest of:
(i) The date on which “the Neils” enter into the agreement of the disposal.
(ii) The date on which “the Neils” gift the residential land.
(iii) The date on which the residential land of the “the Neils” is compulsorily
acquired by the Crown, a local authority, or a public authority under any Act.
(iv) If there is a mortgage secured by “the Neils” on their residential land, then the
date on which the land is disposed of as a result of their defaulting.
OR
(b) If none of the above apply, the date on which the Neil’s interest in their residential land
is disposed of, then the date of acquisition on which the other person acquires the
residential land.
2. Section CB 6A defines the term trustee as the entity described under s.62(2) of
the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017.
To further explain the situation of the Neils and to strengthen their case from the taxation point
of view, I have extracted certain similar case studies from the archives of the New Zealand High
Court and Supreme Court judgements, which I am reproducing below.
(A) Anzamco Ltd (in liq) v Commissioner of Inland Revenue
High Court of NZ Case No. (1983) 6 NZTC 61,522
The holding company purchased the property with an intention of farming and not for the
purpose of reselling it. The taxpayer’s cited the relevant section 67 which is applicable only to
developments into lots and this was not done by the taxpayer.
(B) Aubrey v Commissioner of Inland Revenue
High Court of NZ Case No. (1984) 6 NZTC 61,765
Aubrey operated a family farm and in 1964 he received Council approval of subdividing the
farm into lots. The approval was on condition that the taxpayer carry out the development work

for a cost of $20,280. The Commissioner submission of correct application of s.67 was upheld
and the profits of Aubrey were rendered taxable.
(C) Bates v Commissioner of Inland Revenue
Supreme Court of NZ Case No. SCNZ (1955) 11 ATD 96
Bates had converted some of the properties into flats and rented them to tenants. When the
commissioner included some of the properties in his Land Tax returns, he stated that his
business consisted of buying, renovating and selling houses. However, learned Henry, J. held
that the appellant was not carrying on business of dealing in land within the meaning of s. 79 (1)
(c).
(D) Morrow v Commissioner of Inland Revenue
High Court of Hamilton Case No. (1989) 11 NZTC 6,053
Morrow admitted that his intention related to the sale of the land and the seven acre block was
sold to developers. The Commissioner submitted that one of the purposes of acquisition was the
subsequent sale of the land.
(E) Vuleta v Commissioner of Inland Revenue
Supreme Court of NZ Case No. (1961) 13 ATD 41
It was held by the court that the appellant was into the scheme devised for the purpose of
making a profit and these profits were assessable income within s.88 (c) of the Land and
Income Tax Act 1954.
(F) Wellington v Commissioner of Inland Revenue
High Court of NZ Case No. (1981) 5 NZTC 61,101
Wellington submitted before the High Court that the subdivision of the amalgamated block back
into the original lots was not covered under s.88AA(1)(d). He also contended that, even if the
subsection was applicable, the profits would be exempt under s.88AA(3) as the subdivision of
land occupied was principally a residential land.
LIST OF REFERENCES
CCH New Zealand (ed). (2013) New Zealand Master Tax Guide (2013 edition). Auckland:
CCH New Zealand Limited.
CCH New Zealand Ltd (ed). (2013) New Zealand Income Tax Act 2007 (2013 edition).
Auckland: CCH New Zealand Limited.

ird.gov.nz. (n.d.) The Inland Revenue Department of New Zealand. Extracted on 12 October
2017 from https://www.ird.govt.nz/?id=201405MegaMenu
James, S., Sawyer, A. and Budak, T. (ed). (2016) The Complexity of Tax Simplification:
Experiences From Around the World. Hampshire: Springer.
Littlewood, M. and Elliffe, C. (ed). (2017) Capital Gains Taxation: A Comparative Analysis of
Key Issues. Cheltenham: Edward Elgar Publishing.
Lymer, A. and Hasseldine, J. (ed). (2012) The International Taxation System. New York:
Springer Science & Business Media.
Scully, G.W. and Caragata, P.J. (ed). (2012) Taxation and the Limits of Government. New
York: Springer Science & Business Media.