The blueprint that was released recently for the rebuild of central Christchurch is a bold, ambitious and exciting plan. Once achieved, it will represent a significant change to the way we live, work and play “in town”. While the outline has been described as visionary (one commentator hopes a natural catastrophe will visit his city so that it would get a similar revamp), the devil will be in the detail.
Of particular note is the inevitable compulsory acquisition of land required to create the designated precincts, including “the frame”, new central library, convention centre and bus interchange. When it comes to the taxation of land sales, a disposal of land “includes compulsory acquisition under any Act by the Crown, a local authority or a public authority.”
The Income Tax Act contains a number of provisions that deal specifically with the taxation of profits from land sales, including:
- Land acquired with the purpose or intention of disposing of it;
- Land acquired for the purpose of a business relating to dealing in land, land development or building;
- Land acquired while the person, or someone associated with them, has a business of dealing in land or developing land, and it is sold within 10 years of acquisition (or within 10 years of completing improvements in the case of a building business);
- Commencing more than “minor” work to develop or subdivide the land within 10 years of acquiring it;
- Major developments involving “significant expenditure” being carried out on the land (regardless of how long it’s been owned);
- Where land is sold within 10 years of acquisition and at least 20% of any profit is attributable to a zoning change or resource consent.
The existing rules contain numerous exemptions for residential land, business premises, farm land and investment properties but they are not uniform and don’t always apply.
Those exemptions are set to be augmented by a special Canterbury earthquake one. Last week, a supplementary order paper was released. Its purpose is to ensure that the provisions dealing with the disposal of land within 10 years of acquisition will “not apply to a person and land or buildings purchased by the Government from the person under…the Canterbury Earthquake Recovery Act.” That should provide some comfort to land owners who might otherwise be caught by the 10 year rule.
The proposed legislation also provides a number of further tax measures to provide tax relief from the aftermath of the earthquakes. For example, current rules mean that insurance receipts for deductible items (like repairs and maintenance) are income when received; the proposed changes will allow the income to be deferred until it can be offset against the related expenditure. Other measures ensure that the provisions introduced last year for depreciation rollover relief on replaced assets work as intended.
Some of the changes will provide relief from otherwise potentially unfair outcomes. For example, to be able to claim depreciation on an asset normally requires that the asset is used or available for use in earning income. That’s hard to establish if your coffee-machine is still stuck in the middle of the red zone. Such assets will now be treated as available for use – even if the earthquakes mean they’re not.
The proposed amendments range as far as considering the effect of damage to property resulting from the Canterbury earthquakes on the calculation of a multi-national company’s group debt percentage, which affects the ability of such companies to claim interest deductions in New Zealand under the thin capitalisation rules.
When surveying the damage wreaked on Christchurch by the earthquakes, the first thought is unlikely to be “Oh dear, this might hurt my tax position”. These proposed changes, like those already introduced, at least go some way to lessening that particular pain.
Further enquiries, please contact:
Grant Thornton New Zealand Ltd
T +64 (0)3 379 9580