New law on tax avoidance

Press, 13 October 1982, Page 11

New law on tax avoidance

Parliamentary reporter

Major changes to counter income tax avoidance through farming and property investment. foreshadowed in the Budget, have been made by the Government in legislation introduced to Parliament yesterday.

There are three main Budget proposals covered in the Income Tax Amendment (No. -2) Bill-

First: The proposed recovery of interest and development expenditure deductions where farms, fish farms, and land used in the production of income, are sold at a profit within 10 years of acquisition; Second: The proposal to treat farming, fish farming, horticultural and propertyowning partnerships and syndicates of more than six people as companies for income tax purposes; and

Third: The proposal that losses created by the writing down of livestock to standard or nil values would in future be able to be written off against farming income, but

not against income from other sources.

The 10-year minimum period of land ownership necessary to prevent deductions previously allowed for interest and farm development expenditure from being recovered on the sale of the property, would now apply only to properties sold on or after April 1, 1983, said the Minister in Charge of the Inland Revenue Department, Mr Falloon. The interest that would be subject to recovery would be that paid on money borrowed to finance or refinance the purchase of land and buildings and improvements to the property. To provide a measure of relief for farmers, including “stepping-stone” farmers, exemption from the new provisions would be available on the occasion of the first sale by a farmer of a farm property held for less than 10 years, Mr Falloon said. To qualify for this exemption, the farmer had to acquire a replacement economic farm unit within 12

months of the sale of the first property and had to hold that replacement unit for at least the rest of the 10year period. If the replacement property were sold within 10 years from the date it was acquired, the recovery provisions would apply to interest and development expenditure deductions allowed in that period over the replacement unit, he said.

Regardless of the period that had elapsed since the date of acquisition, sale of a property by anyone after the compulsory acquisition by the Crown or any public or local authority, or as the result of the death of anyone, would be exempt from the new provisions. Mr Falloon said the Government would not now proceed with its intention to treat syndicates and partnerships as companies for income tax purposes.

Instead, the bill contained provisions that would apply over losses incurred in 198384, and subsequent income years.

All losses, over and above $lO,OOO a year, incurred by a taxpayer in any of the activities of farming — agriculture. horticulture, viticulture, income ■ derived from livestock, fish farming, or property owning — would be locked into that activity and not available for offset against income derived from other activities or sources.

The balance of any losses over $lO,OOO a year would be carried forward and available for offset against future income derived from that activity, or against any other income subject to the $lO,OOO a year limitation. Assessable income arising on the recovery of interest and developmental expenditure could be spread over the year of the sale of the land and any of the four preceding years, or spread over the period of ownership where that was less than four years, by syndicates.

Mr Falloon said relief was provided in the bill for certain taxpayers.

These included stepping stone farmers and those

whose properties were affected by adverse events, who would suffer undue hardship from the provisions, and for farmers who diversified their activities. The Commissioner of Inland Revenue would have a discretion to allow an unlimited offset of losses against any income from personal exertion — whether as an employee or from a part-time or temporary business — derived by a taxpayer who:— • Devoted a substantial part of their time to personally carrying on the farming activity which was or would become their livelihood; and

• Took on that employment or activity primarily to meet or augment their essential living expenses or farming costs; and

• Would suffer undue hardship through the locking in of the losses incurred.

Those relief provisions did not apply to any taxpayer engaged in any property activity. Mr Falloon said.

There were a number of other exemptions in the bill.