CIR v Boanas
Prudent eye to the future is not an intention to sell
Assessment within time bar though notice delayed
CIR v Boanas & Ors (2008) 23 NZTC 22,046
This decision is an appeal and cross appeal from a decision of the TRA which was in favour of the taxpayers. The Commissioner had assessed the taxpayers on the basis that they acquired land with the purpose or intention of selling or disposing of it, and accordingly were caught by section CD 1(2)(a) of the Income Tax Act 1994. However, the High Court was satisfied the taxpayers discharged the onus on them to prove they did not have the requisite purpose or intention of resale at the time of acquisition of the freehold. This was despite the fact the section CD 1(2)(a) has been broadened and the purpose or intention need now only be one among a number of purposes or intentions.
The taxpayers had held 1,400 hectares of rural land as a sheep station in a formal partnership since March 1996. After acquiring the freehold in May 1997, they decided it was advantageous to put the land into a separate entity for the purposes of various developments that they had planned to proceed with. Accordingly, the partners incorporated a family company and, in February 2000, entered into an agreement to sell the freehold estate to the company for $4.32 million.
The judgment addressed three main issues. The first issue was how purpose or intention should be assessed in the context of a transaction undertaken by a partnership. The second was what was required to amount to a “purpose or intention” of selling or disposing of land. The third addressed an argument as to whether a time bar applied.
Relevant purpose or intention for partnership
In relation to the first issue, it was held that it is the partnership’s intention that is relevant because it is the partnership which undertakes transactions such as acquisition and disposal of land. Therefore, inferences that could be drawn from particular documents or from the conduct of a particular partner could be attributed to the partnership as a whole.
How purpose or intention ascertained
The judgment also discusses what will amount to acquiring land with the “purpose or intention” of selling or disposing of it. A purpose or intention of resale need only be one of any number of purposes or intentions. The Court considered that a useful analogy to reveal purpose is to consider how managers with delegated authority would have justified the purchase to a board of directors or the company’s shareholders at the time. This would mean answering questions such as “why did you buy” and “how do you justify having spent the money you did?”. The requisite purpose of resale will only arise if the prospect of ‘trading’ in the land was a material aspect of the justification for purchase. In coming to his conclusion, Dobson J took account of the totality of circumstances to assess their combined impact and emphasized that any assessment of purpose or intention is context dependent.
Notably, the court was not persuaded that a desire to ultimately sell land was enough to be caught under section CD 1(2)(a). This was so despite the fact the taxpayers acknowledged the purchase of the land was a "stepping stone" to a more valuable farm and the taxpayers had made enquiries regarding the resale potential of the land. These factors were found to be a “prudent eye to the future”, rather than reflective of a purpose of resale. The Court noted that if acquiring a "stepping stone" farm was enough to be fixed with an intention to sell, the section would catch virtually every first time farm buyer, and that could not have been intended.
There is every reason to expect that this approach is equally applicable to non farming properties. The Court seems to have recognised that getting on the property ladder in the hope of betterment does not necessarily involve an intention to sell such as to take property into trading stock as the section contemplated
The Court appeared hesitant to widen the section and commented that in the absence of a general capital gains tax, profits on disposal of land which is generally a capital asset are only to be taxed as income where in effect the land is treated as a trading asset. The evidence in this case established that substantial efforts were made in assessing other forms of land use, which would not necessarily have involved sale of any part of the land.
Time of assessment for time bar purposes
The Court dismissed a cross-appeal by the taxpayer that the assessments had been made out of time. As a result of an internal computer error, the assessment notices were mistakenly held in the IRD system for checking after they had been made. It was held that because the Commissioner’s delegated investigating supervisor had regarded the signing off of the assessments as final, the assessments had been made at that point rather than at the point the notices were actually issued to the taxpayer. A subsequent informal checking process did not deprive the assessments of their status under the Income Tax Act. Therefore, the assessment notices were held to have been made in time.
The Court applied well settled authority on the nature of an assessment to conclude that the actions of the Commissioner had occurred within the time limits and were therefore valid. There is a difference between an assessment and notification of it. As long as the Commissioner has arrived at his judgement of the taxpayer’s liability it is not relevant that notice to the taxpayer is delayed. The argument about timeliness of the assessment focused on the significance of the taxpayer’s account having been given an “account review” status under the IRD’s computer system. The taxpayer argued this meant the assessment could not be final.
The Court held that the delegated officer of the IRD had exercised the statutory power of assessment. He had read the relevant report, arrived at a view and stamped and signed the report. The fact that, unknown to him, the computer system assigned the account a certain status did not rob the assessment of effectiveness. That might have been different if the delegate had known of the account review and that it meant his assessment might be revisited, but he did not. The key in this case was that the computer assigned the account review because of certain preset statistical characteristics of the account rather than as any conscious qualification or conditioning of the assessment.
The case raises an interesting issue: the preference apparently given to human decision-making within the IRD over the operation of its technology. The Commissioner had presumably directed that the statistical characteristics of the taxpayers would have the result of an account review, yet that did not qualify or condition the decision of his delegate. It is difficult to see why it should not have, and why and delegate ought not to have been expected to check that a review would not be triggered if that was a possibility.
The Court's conclusions on this point are not altogether satisfactory. Rather than relying on whether the delegated officer had known of the account review, the question ought to have been whether, as a matter of fact, the allocation of that status gave rise in this case to a real (as opposed to theoretical) possibility that the officer's assessment decision would be revisited. His knowledge might be one factor in deciding that, but the decision ought not to have turned on that.