Prior to the Amendment
It is common for taxpayers to purchase land together as co-owners and then subdivide the land and allocate the subdivided parcels to each of the co-owners depending on their ownership interests in the original parcel. This is referred to as partitioning.
S GC 1 of the ITA deems the partitioning to occur at market value. IRD has consulted on a draft interpretation which stated that the partitioning of land among co-owners constitutes a disposal under the bright line test and other land sales provisions. Therefore, an income tax liability can arise.
Example:
When the property has been partitioned, the co-owners have legally transferred 50% interest in that parcel to the other owner. Their bright line income will be the value of their share of the parcel. If either of the co-owners uses their land as their main home, then the main home exclusion from bright line will apply.
This means that under the current interpretation of the law, there are 2 points of taxation. The first being at taxation and the second at the final sale. While S GC 1 of the ITA provides an uplift to ensure double taxation does not occur on the same income, taxpayers may face additional compliance costs and timing issues of the partition and sale occur in different income years.
The Proposed Amendments
The amendments propose to exclude the allocation of sub-divided land among co-owners from being a disposal. This exclusion would apply to the extent that the value of allocated properties under the partition aligns with the co-owners interests in the original undivided parcel of land and contributions to development and construction costs.
S CB 6A(4) and CZ 39(3) will continue to apply so that, where the bright line test applies, the relevant bright line test acquisition date for the allocated subdivided parcels will be the same as the acquisition date for the undivided parcel of land.
The new updated definition of dispose will only apply to the extent that the transfer results in the same proportionate economic ownership as before the transfer. This is not based on land area but rather the market values of the properties compared to the original undivided land and the co-owners contributions to development and construction costs.
If there is a difference between the original land and each co-owner’s contribution to the divided properties, the difference can be subject to income tax. This is because the difference is considered to be an effective disposal for at least on party.
Effective Date
The proposed amendment will take effect for partitions occurring from 27th March 2021. For partitions occurring before this date IRD would not apply resource to identify non-compliance.
{proforms 1}