CISC8805 Taxation Report: Analysis of Land Sale Tax Implications

This report provides a detailed analysis of the tax implications of land sales for Tim and Lacey Neil, referencing the Income Tax Act 2007 and relevant case law. The report examines the Neil's initial intention for acquiring land for dairy and poultry farming and the subsequent subdivision and sale of the land. It addresses key issues such as the impact of building a dwelling, subdividing the land, and selling the lots on their tax liabilities. The report considers factors like the intention of the buyer at the time of acquisition, the period of holding, transaction history, and association with the property industry. It analyzes the application of sections of the Income Tax Act, including CB 6, CB 13, and EZ 48, and relevant case law such as Anzamco Ltd v CIR, Aubrey v C of IR, and Morrow v CIR. The report explores the concept of capital gains tax versus business income tax and the applicability of the main home exemption. The analysis concludes with recommendations for the Neil’s regarding their tax obligations, based on the provided facts and legal provisions.

Running head: TAXATION
Taxation
Name of the Student:
Name of the University:
Authors Note:

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Contents
Introduction:....................................................................................................................................2
Part A:..............................................................................................................................................2
Part B:..............................................................................................................................................9
References:....................................................................................................................................14

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Introduction:
Income Tax Act, 2007 is the premier tax legislation in New Zealand. The facts provided
in the individual cases shall be evaluated from the point of view of Income Tax Act, 2007. Based
on the findings a detailed report shall be prepared to recommend the right course of action to the
specific circumstances and situations.
To,
Tim Neil.
CC: Lacey Neil.
Re: Outlining tax implications of the profits on sale of seven lots of land.
Respected sir / madam,
This letter is in reference to the above subject matter. Using appropriate provisions of Income
Tax Act 2007 a detailed discussion on the tax implications are provided below.
Part A:
Issue:
1. The intention of acquiring the land at the first instance by the buyers.
2. Does building a dwelling in one part of the land renders the entire property the exemption status
under main home clause of Income Tax Act 2007?
3. Tax implications of subdividing the land into different lots.
4. Tax implications of selling seven lots to the buyers.
Theory:

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 Section YA1 of the Income Tax Act 2007 (ITA 2007).
 Section YD1 of ITA 2007.
 Section CB 6 of ITA 2007.
 Section CB 13 of ITA 2007.
 Section EZ 48 of ITA 2007.
 Anzamco Ltd (in liq) v CIR (1983).
 Aubrey v C of IR (1984)6 NZTC 61,765.
 Morrow v CIR (1989)11NZTC 6,053.
Rules:
A conditional or unconditional agreement entered into by a person with the object of acquiring or
selling a property and is not an option or future contract is how an agreement for the sale or
purchase of property has been defined in EZ 48 of ITA 2007 (Calitz & Van Zyl, 2016).
Section CB 6 of the act explains amount received from disposal of land will be treated as income
for tax purpose of the recipient if the land was acquired for more than one purpose and one of the
purposes of acquisition of the land was to dispose it off in the future (San Juan, 2017).
Section CB 13 of ITA 2007 states that an amount derived from disposing off land will be treated
as income of the person receiving such amount under the section if the amount has not been
assessed as income under any of sections CB 6A to CB 12 as well as section CB 14. An amount
derived from a scheme or undertaking which is not exactly business will be considered as
income of the person under section CB 13 of the act (Saad, 2014).
Inland Revenue Department is the statutory department of New Zealand government
provided with necessary powers and rights to administer tax related matters in the country. Often

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it is heard that there is no capital gain tax in New Zealand. Well it is not entirely true. The tax
laws in New Zealand ensure collection of taxes in different names using hidden laws on gains
from buying and selling of properties in the country (Mulligan, 2015). Thus, even if not called
capital gain tax but Inland Revenue Department (IRD) collects property investment tax on profit
and gains of sale of properties in the country.
The perception of IRD in relation to the transaction shall be the determinant factor in
ascertaining the liability to ITA 2007 in the country. In case if the perception of IRD is that a
person is trading in properties. Thus, earning profits and losses from buy and sale of profit would
be assessable as income from business from the property trading of such person. On the other
hand the investors with the intention of earning rent from properties or dividend from equity
investment, such incomes shall be assessed as taxable income and accordingly, taxed as per the
provisions of ITA 2007 (Exeter, Zhao, Crengle, Lee & Browne, 2017).
IRD while assessing the taxability of such transactions associated with properties in the country,
it considers the following factors to determine the nature of such transactions and assessable
income from such transaction to tax accordingly.
The intention of the seller at the time of buying the property:
If at the time of buying the property the objective behind the acquisition is to resale it then
irrespective of the number of properties of similar nature that the buyer had, the sale proceeds
from the sale of such property at the time of selling will be liable to capital gains tax in the
country (Cordery, 2018).
The period of holding:

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The period of holding of a property before the sale of such property is an important factor in
determining the income tax liability on sale of such property. In case the property is held for less
than 2 years or 24 months before the date of sale then profit on sale of such property is
automatically taxed in the country (Johnston, 2017).
The transaction history of the tax payer in buying and selling:
In case a person has particular pattern that suggests historical transactions of similar characters
with properties buying and selling then the person would be regarded as a trader in property. In
such case the amount of profit and losses from buying and selling of such properties would be
taxed as business income and not as capital gain in the hands of the tax payer (Edeigba &
Amenkhienan, 2017).
Association with property industry or with a person who works in property industry:
In case the seller is associated with the property industry in his capacity as a property developer,
trader, and builder or is associated with any person who works in the property industry then the
gain on sale of properties within ten years will be taxed as capital gain in the hands of the seller.
Thus, the connection with the property industry is an important consideration in determining the
nature of income and subsequent tax liabilities on such income (Creedy & Eedrah, 2016).
In addition to the above IRD makes it compulsory for the tax payers to provide all
relevant details about the tax payers and the transactions effected by them in relation to the
particular properties and historic transactions. As already mentioned that the liability to pay tax
on sale of property is dependent on four key aspects, these are; intention of the tax payer at the
time of acquisition of the property, the history of buying and selling of properties of the tax
payer, seller’s association with the property industry and whether the asset was sold within 5

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years from the date of acquisition of such asset. In case the property was brought between
October 01, 2015 and March 28, 2018, inclusive of both days, then the period of 5 years have
been reduced to 2 years for determination of tax liability on sale of properties by the tax payers
(Pega, Blakely, Glymour, Carter & Kawachi, 2016).
The intention at the time of acquisition:
Even if the intention at the time of acquiring the residential property was to resale it, the
exemption provided under main home clause is applicable to the seller. Apart from that in case
of inherited property, the bright line test does not apply as is the case with the executor and
administrator of a deceased estate (Huizinga, Voget & Wagner, 2018).
Summarizing from above it can be said that the income that the income tax liability of a person
from sale of a property would be dependent on number of factors. Primarily a person will be
liable to pay either capital gain tax or business tax depending on the nature and character of the
transaction. In case the seller is a trader who is involved in buying and selling of properties then
income arising on sale of such properties would be taxable as business income of the seller (Cruz
& Alley, 2017). However, in case the property was acquired with the intention to resale it or with
the intention to earn long term income from such properties then, profit or loss on sale of such
properties would be taxable as capital gains or capital loss as the case may be. However, the
‘personal property’ concept is applicable to the sale of such properties also and in case of a
residence which is the main residence of the seller and his family then, sale of such property
would not be under the purview of capital gain or business income for tax purposes (Kelsey,
2015). Thus, in case of a person selling a residential property which is his main home then the no
part of sale proceeds received from sale of such property would be assessed for income tax

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purposes in the country. In Anzamco Ltd (in liq) v CIR (1983), it was established by the court that
in case an asset has been brought with the intension of reselling then proceed received from sale
of such asset is taxable under s CB 6. The honourable judge in Aubrey v C of IR (1984)6 NZTC
61,765, has provided that all expenditures incurred in division and subdivision of land is allowed
to compute taxable income from sale of such land under s CB 13. It was further established in
Morrow v CIR (1989)11NZTC 6,053, that proceeds realized from sale of land is taxable in the
hands of the recipient if disposal of the objective was the motive or one of the motives of
acquiring such land at the first place (Cassidy, 2017).
Application:
As per the information provided, Tim Neil and Lacey Neil, here in after to be referred to as the
Neil’s only, acquired around 3.5 hectares of land with the objective of conducting dairy and
poultry firming in the land. Thus, the intention of the buyers at the time of acquiring the land was
pretty clear, it was to conduct dairy and poultry firming. In 1985 the 3.5 hectares land was
brought by $750,000 and in 1986 the Neil’s built a house on the land where they started living
since then. Construction cost of building the house in 1986 was $200,000 (Fabling, Gemmell,
Kneller & Sanderson, 2014).
After 12 years of purchasing the land, Neil’s decided to form two discretionary trusts in order to
transfer the land to the trusts. Neil’s were the settlor and trustees of the trusts. The valuation of
the land as per the expert at the time of transfer of the property to the trusts was $2.5m excluding
GST. However, since the market value was not realized at the time of transferring the land to the
trusts thus, there is no question of income and subsequent tax on such income due to the transfer
of the property to the trusts (Krawczyk & Townsend, 2015).

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The land was subdivided into five lots after 2 years from the transfer of the property to the trusts
subsequent to the grant of resource content. It costs of the trusts $100,000 to apply and get the
approval for the resource content. Out of the five plots, Neil’s retained the largest lot while it was
decided that the remaining lots shall be sold to the interested buyers via a confidential tender
process. The trustees also signed an exclusive listing agreement to sell the remaining lots to the
interested buyer (Greig, Nuthall & Old, 2018). Subsequent to the listing agreement with Roy
White Real Estate, the trustees were advised to subdivide the remaining four lots into fifteen lots
to improve the financial return from the property. With increased demands in the market of lots,
the Real estate agent has successfully sold the seven lots with the remaining lots are still in the
market for interested buyers to acquire.
From the above facts the following key points can be can be drawn as per the provisions of the
ITA 2007 and the instructions and notifications of IRD:
The intention of Neil’s was not to conduct business on the land:
Initially, at the time of buying the 3.5 hectares land, the intention of the buyers was to conduct
dairy and poultry firming. Thus, there was no intention to resale the land to earn capital gain
from sale of such property (Kelsey, 2015).
Building of residency house on the property cannot be considered as an exemption under ‘main
home’ clause:
ITA 2007 and IRD have clearly explained that in case of main home the income accruing from
sale of such property would not be liable to capital gain or business tax. However, in this case the
land was not acquired for building home. It was an after though to build a home on the property.

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Thus, the entire land would not be exempted from income tax provisions of ITA 2007
(McCluskey & Franzsen, 2017).
Transfer of property to the trusts is not a taxable transaction:
The decision of the Neil’s to transfer the property to the discretionary trusts with Tim and Lacey
as the settlors and trustees of the trusts is a not a taxable event. Even though the expert valuations
showed a value of $2.5m of the property immediately prior to the transfer of such property to the
trusts however, since the value was not received at the time of transfer hence, it is not a taxable
transaction. No tax liability will arise to Neil’s subsequent to the transfer of the property to the
trusts (Greig, Nuthall & Old, 2018).
Subdivision of land:
The subdivisions of land, firstly into five lots and then another subdivision of four of the five lots
into fifteen lots by the suggestion of the real estate agent do not yield any monetary and financial
benefits immediately subsequent to such subdivisions. Hence, no income tax liability will arise
even at the stage of sub-division of the lots of land (Bodwitch, 2017).
Listing agreement with Roy White Real Estate and subsequent sale of seven lots:
The objective behind subdivision of four lots into fifteen lots subsequent to the signing of
exclusive listing agreement by the trustees with Roy White Real Estate is purely with the
objective of selling fifteen lots to the interested buyers with the intention of earning profit from
sale of such lots. Thus, the objective of subdivision of four lots into fifteen lots and sale of these
lots was purely commercial. Hence, income from sale of seven lots will be treated as assessable

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income from business of the trustees, Tim Neil and Lacey Neil. Accordingly, the income from
sale of such lots will be taxed in the hands of the trustees (Cruz & Alley, 2017).
For the remaining 8 lots which are currently used for horse grazing will not be considered for
computing the assessable income from business of the trustees at present. However, subsequent
to the sale of these lots the trustees will be liable to pay tax on the income from sale of the
remaining lots (Exeter, Zhao, Crengle, Lee & Browne, 2017).
Conclusion:
Taking into consideration the discussion about the different rules and regulations governing the
income tax provisions in the country, it can be concluded that the profit from sale of seven lots
will be considered as assessable income of the Trustee at the time of receiving the amount from
sale of such lots. It is important to note that all necessary expenditures incurred in subdivision of
the land into 5 lots at the beginning and then subsequent subdivision of the four lots into fifteen
lots shall be allowed as deduction in computation of taxable profit from sale of seven lots. The
resultant profit after deducting all eligible expenditures shall be considered in determining the
taxable profit from sale of seven lots. The taxable profit from sale of these lots will be assessed
as income from business of the trustees and accordingly tax shall be paid on such profit.
Dated: October 05, 2018.
Place: Regards,
(Name of the student)

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To,
The Tim Brown,
Accountants, Just Juices Limited.
Re: Outlining tax residency of just Juices Limited.
Respected sir,
This letter is in reference to outlining the tax residency of Just Juices Limited. Using appropriate
provisions of Income Tax Act 2007 the tax residency of the company shall be explained here.
Part B:
Issue:
In this case the issue is to determine the tax residency of Just Juices Limited. Taking into
consideration appropriate rules and regulations of ITA 2007 and guidelines of IRD, a descriptive
analysis on the tax residency of Just Juices Limited is explained below.
Theory:
 YD 2 of the Income Tax Act 2007 (ITA 2007).
 Diamond v C of IR (2015) 27 NZTC 22-035 Court of Appeal, CA505/2014, [2015] NZCA 613.
 New Zealand Forest Products Finance NV v Commissioner of Inland Revenue - (1995) 17 NZTC
12,073.