Council approaches IRD on retrospective tax policy

Inland Revenue. Photo / Janna Dixon

The Property Council has made a submission to Inland Revenue in relation to a proposed retrospective tax on commercial property lease inducements.

In a July 26 paper the IRD policy advice division said its officials were concerned about the tax treatment of lease inducement payments and "the resulting revenue risk" to the tax base.

The paper suggested that a possible solution would be to make these payments taxable retro-spectively to any arrangement entered into on or after the date the proposal was released (July 26), regardless of the actual date of payment.

Property Council adviser Hannah Diprose said the council's submission recommends that:

The date for application of the policy should not be historical;

Eligibility for deductions should be calculated fairly;

Deductions should be immediate and not spread over time;

A wider scope for the review by IRD was needed.

The council said the existing retrospective application date of July 26 meant taxpayers were having to take tax positions without knowledge of the full detail of the new policy "and, importantly, without any legislative authority".

Ross McKinley, senior tax partner at KPMG, has said that stated that his firm "strongly disagrees with IRD and Treasury proposals to tax lease inducement payments made by landlords to tenants".

McKinley said KPMG was concerned about the attempt to "legislate by issues paper".

"The application date of the proposals is the date of publication, meaning they will be effective for leases entered into on or after July 26. This will undoubtedly create uncertainty over the treatment of such payments in the interim until any legislation is passed," McKinley said said.

Chapman Tripp partners Casey Plunket and Graeme Olding have said they "object very strongly to a purported change of law by the IRD, a member of the executive branch of government. Changes to legislation only have effect when Parliament passes an amendment. Until that time, taxpayers are entitled to rely on the law as it is written on the books, not as proposed by the tax department."

The lawyers likened the IRD's actions of applying the proposed tax retrospectively to that of former Prime Minister Rob Muldoon who, in 1975, told workers they could stop paying superannuation contributions as he would have legislation passed in Parliament in the 1976 session which would retroactively abolish the superannuation scheme. The then Supreme Court held that "the pretended power of suspending" laws by the executive branch of Government was illegal.

"In our view, IRD's announcement is attempting the same thing," Plunket and Olding said.

"The 'pretended power' of imposing tax on lease inducement payments, prior to consideration and ratification by Parliament, is unconstitutional.

"It is also not in keeping with the IRD's generic tax policy process, which requires consultation on most matters before changes are proposed or enacted."