Roll-over relief for buildings and land held on revenue account

Section CZ 25 of the Income Tax Act 2007

Section CZ 25² was introduced in 2011 to provide special roll-over relief for profits arising from compensation payments received in relation to buildings held on revenue account that were destroyed due to a Canterbury earthquake. The relief did not apply to land, or to buildings that were not demolished, or abandoned for later demolition.

If the roll-over relief provision applies, the cost of any replacement building for tax purposes is reduced by [up to] the amount of profit made on the destroyed building. The effect is that, in most cases, a tax liability arising from the profit from compensation or insurance received in relation to the destroyed building is deferred until the replacement building is eventually sold.

Key features

The roll-over relief now also applies to:

• land held on revenue account that is damaged as a result of the Canterbury earthquake; and
• Crown purchases of buildings held on revenue account. This is intended to address purchases being made under the Government's "red zone compensation package", and applies even in situations when the building is not demolished.

Detailed analysis

New section CZ 25(1)(a)(i) applies the roll-over relief provisions to land held on revenue account that is damaged as a result of a Canterbury earthquake.

New section CZ 25(1)(a)(ii) applies the roll-over relief provisions to both land and buildings, if the owner accepts the compensation provided by the Crown's offer of purchase made in accordance with section 53(1) of the Canterbury Earthquake Recovery Act 2011. In this situation only, the roll-over relief can be claimed regardless of whether the building is destroyed or abandoned for later destruction.

The remaining conditions of the roll-over relief, which relate to the replacement building or (now) replacement land, remain unchanged. In summary these are:

• The owner must incur, or intend to incur expenditure on replacement building(s) or land in or before their 2015-16 income year.
• The owner must hold the replacement building(s) or land on revenue account.
• The replacement building(s) or land must be located in the greater Christchurch area (as defined by section 4 of the Canterbury Earthquake Recovery Act 2011).

Amounts received under a Crown offer of purchase for a building may be used to acquire replacement land and vice versa, as long as the remaining conditions are met.

Application date

The amendments apply from 4 September 2010, being the same date as the roll-over relief became effective.

² This roll-over relief provision was originally inserted as section CZ 23 by the Taxation (Tax Administration and Remedial Matters) Act 2011. Section CZ 23 was already in the Income Tax Act 2007, the newly inserted section CZ 23 was renumbered as section CZ 25 by the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act.