The Issues Log

Issue: CB 11(1)

Submission Number

008

Section / Provision Income Tax Act 2004

CB 11(1)

Date Received

18/03/2005

Description of issue

This section states that: An amount that a person derives from disposing of land is income of the person if -

(a)	the amount is not income under any of sections CB5 to CB 10 and CB 12; and
(b)	the amount is derived in the following circumstances:

	(i)	an undertaking or scheme, which is not necessarily in the nature of a business, is carried on: and
	(ii)	the undertaking or scheme involves the development of the land or the division of the land into lots; and
	(iii)	the person, or another person for them, carries on development or division work on or relating to the land; and
	(iv)	the development or division work involves significant expenditure on channelling, contouring, drainage, earthworks, kerbing, levelling, roading, or any other amenity, service, or work customarily undertaken or provided in major projects involving the development of land for commercial, industrial, or residential purposes.

Under this section any development work of a significant nature is taxed on the total value of the land transaction, rather than being taxed on the extent of the amount derived from the scheme as would be the case under the 1994 act. This is clearly an unintentional change.

Section / Provision Income Tax Act 1994

CD 1(2)(g)
Section 1(2)(g) of the Income Tax Act 1994 taxes amounts derived from the sale of land to the extent that the amount derived from the carrying on or carrying out of any undertaking or scheme involving the development or division into lots of land and the development or division work (being significant expenditure) is carried out by or on behalf of the taxpayer.

This section implies that amounts are taxable only to the extent where income is derived from the scheme or undertaking. This is to say that part of the sale price which is not generated by the scheme is not taxable. Therefore only part of the land sold that has been altered or improved by the scheme (e.g. the drainage, kerbing, driveways etc) is taxable.

Status

Finalised

Outcome

The Panel is not persuaded that an unintended change arises in respect of section CB 11(1) of the ITA 2004.

The Panel:

has asked IRD to consider issuing a statement setting out the tax treatment when all or part of a property enters into a scheme for development and when property is withdrawn from a scheme.
recommends a retrospective amendment to the ITA 2004 if an unintended legislative change is confirmed in the light of the Panel's view of the preceding legislation as capturing only the gain in respect of such property and so on revenue account during that period.

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