General policy statement
This Bill introduces amendments to the Income Tax Act 2007 and the Tax Administration Act 1994.
The policy of the Bill is to improve compliance with the current land sale rules in the Income Tax Act 2007 by supplementing the current intention test in section CB 6, which makes gains from the sale of land purchased with a purpose or intention of disposal taxable.
The reason for the policy is that the current land sale rules can be difficult to enforce. Specifically, there can be difficulties determining a taxpayer’s purpose or intention in relation to land. The difficulties have meant that some land speculators are not paying their fair share of tax on gains from property sales.
This Bill proposes a new objective “bright-line” land sale test, to improve compliance. The bright-line test will require income tax to be paid on any gains from the disposal of residential property that is acquired and disposed of within 2 years, subject to some exceptions.
The 2-year period for the bright-line test runs from the date of acquisition of the land to the date of disposal. The date of acquisition is the latest date on which the person acquires an estate or interest in the land. Generally, this will be the date the instrument to transfer the land to the person is registered for the purchase of the property. The date of disposal is generally the date that a person enters into an agreement for sale and purchase for the sale of the property. When the disposal is other than by sale (for example, by gift), the date of disposal will be determined by the current tax rules. If disposal occurs before registration (sales of the right to buy), the bright-line period runs from the date that a person enters into an agreement to purchase the right to the date that a person enters into an agreement to sell the right.
The bright-line test applies only to the disposal of “residential land”. It does not apply to land used predominately as business premises or farmland. “Residential land” is defined as land that has a dwelling on it, land for which the owner has an arrangement to erect a dwelling, or bare land that because of its area and nature is capable of having a dwelling erected on it.
There are 3 specific exceptions to the bright-line test for:
A disposal of property that is the main home of the transferor (in certain circumstances);
A disposal of inherited property;
A transfer under a relationship property agreement.
A disposal of property that is the main home of the transferor will be excluded from the bright-line test when the property has been used predominately, for most of the time that the person has owned the property, as their main home. A property will be the main home of the owner when it has been mainly used as their residence. Where a person has two or more homes, their “main home” is the property with which the person has the greatest connection. If the property is owned by a trust, the main home exception applies when the dwelling is the main home of a beneficiary of the trust (subject to limitations). If the principal settlor of the trust has a main home that is not owned by that trust, then the main home exception cannot apply to any property owned by the trust. A person cannot use the main home exception if they have already used the exception twice in the previous 2 years.
Taxpayers are allowed deductions for property subject to the bright-line test according to ordinary rules.
Losses arising only as a result of the bright-line test are ring-fenced so they can only be used to offset taxable gains arising under the land sale rules. A person cannot recognise a loss under the bright-line test arising from a transfer of property to an associated person.
Anti-avoidance rules will prevent land-rich companies or trusts being used to circumvent the bright-line test.
The rollover relief provisions for land transferred as a result of an amalgamation are extended to apply to the bright-line test.
Certain complying trusts will not have to file a return of income for tax years in which the trustee derives no income.