MyTaxTalk #1: Section CB 6 – A Rare Inland Revenue Win on Intention

By Ifran Nabi

Director | MyTaxMate

Chartered Accountant & Tax Adviser

Inland Revenue recently released Technical Decision Summary TDS 26/08, a decision that I believe deserves the attention of every property tax adviser and property developer.

What makes this decision particularly interesting is that it focuses almost entirely on section CB 6 of the Income Tax Act 2007, the provision that taxes land acquired with a purpose or intention of disposal.

While section CB 6 has existed for many years, relatively few reported cases have considered this provision in isolation. More commonly, Inland Revenue relies on other land taxing provisions, such as those relating to property dealers, developers or subdivisions. As a result, this decision provides a useful insight into Inland Revenue's current approach to proving intention.

The facts

The taxpayer was a property development company that acquired a property approximately 20 years ago.

Around 11 years after acquisition, the director engaged architects to prepare plans for what was said to be the director's future family home on part of the property.

Approximately 8 years ago, the property was subdivided into five lots, with one of those sections eventually being sold.

The company returned GST on the sale but did not return the sale proceeds as taxable income, arguing that the section had always been intended as the director's family home and was therefore not caught by section CB 6.

Inland Revenue disagreed.

Why did section CB 6 apply?

The key point to remember is that section CB 6 looks at the taxpayer's purpose or intention when the land is acquired.

This is an important distinction.

Many taxpayers naturally focus on what they did with the property years late, whether they built on it, subdivided it or eventually sold it. However, those later events do not determine whether section CB 6 applies. Instead, they are simply evidence that may support or contradict the taxpayer's stated intention at the time of acquisition.

In this case, Inland Revenue considered that the taxpayer had failed to produce sufficient contemporaneous evidence to establish that the company did not acquire the land with a purpose or intention of disposal.

One fact appears to have carried significant weight. The property was owned by a property development company.

Although the director argued that one section was intended to become the family home, the relevant question was not the director's personal intention. The question was whether the company, as the owner of the land, acquired it without a purpose or intention of disposal. Given the company's business activity, Inland Revenue found that argument difficult to accept.

The tax planning lesson

In my view, this decision reinforces an important tax planning principle.

If land is genuinely intended to become a long-term family home or long-term investment, careful consideration should be given to which entity acquires the property.

Holding land intended for private use inside a property development company creates an immediate evidential hurdle. Many years later, it becomes much harder to persuade Inland Revenue that the company never intended to sell that land.

Choosing the correct ownership structure at the beginning of a transaction is often just as important as understanding the tax rules themselves.

Could this decision be challenged?

Absolutely.

This Technical Decision Summary records Inland Revenue's adjudication decision, it is not a decision of the Taxation Review Authority or the Courts. The taxpayer can still challenge the assessment.

In my opinion, this would make an excellent test case. Although the taxpayer bears the legal burden of proving Inland Revenue's assessment is wrong, section CB 6 has traditionally been one of the more difficult land taxing provisions for Inland Revenue because intention is inherently subjective.

What makes this case particularly interesting is the timeline. The property was acquired approximately 20 years ago. Architects were only engaged around 11 years later. The subdivision occurred approximately 8 years later.

Those later events may help explain the taxpayer's intentions, but they do not answer the central question. The real issue remains what the company intended when it first acquired the property two decades earlier.

My thoughts

It will be interesting to see whether the taxpayer decides to challenge the assessment in the Taxation Review Authority.

There are relatively few reported decisions dealing with section CB 6 on its own, and further judicial guidance would be valuable for taxpayers, advisers and Inland Revenue alike.

While the ownership of the property by a property development company undoubtedly created a significant hurdle for the taxpayer, I am not convinced that should necessarily be the end of the analysis. Every section CB 6 case ultimately turns on its own facts, and contemporaneous evidence will always be critical.

In my view, simply acquiring land in the wrong entity should not, by itself, result in section CB 6 applying. The legislation requires consideration of the taxpayer's purpose or intention at the time the land was acquired. The entity through which the land was acquired is undoubtedly relevant and may be persuasive evidence of that intention, but it should not replace the fundamental enquiry required under section CB 6.

One final observation

If Inland Revenue's approach in this case is ultimately upheld by the Courts, it could make section CB 6 a much more significant provision than many advisers have traditionally regarded it to be. If a taxpayer who has held land for approximately 20 years is still unable to successfully defend a section CB 6 assessment, it arguably lowers the practical evidential threshold for Inland Revenue in future intention cases.

This is certainly a decision that property developers, investors and tax advisers should keep an eye on.

Disclaimer

The views expressed in MyTaxTalk are my personal observations on current tax issues and should not be relied upon as legal or tax advice. Every taxpayer's circumstances are different, and professional advice should always be obtained before making decisions based on any tax commentary.

About MyTaxTalk

MyTaxTalk is a series of technical tax articles by Ifran Nabi, Director of MyTaxMate. The articles provide practical commentary on New Zealand tax legislation, Inland Revenue guidance and court decisions, with a focus on helping taxpayers and advisers understand the practical implications of complex tax issues.