RSM New Zealand

Capital gains on land transactions – tax free or taxable?

The New Zealand property market, especially Auckland has grown exponentially over the past few years. Property/land is a favoured asset as it generally appreciates in value over time and New Zealand does not have a comprehensive capital gains tax.

However, it is a common misconception that because New Zealand does not have capital gains tax (“CGT”), any gain derived from the sale of a property is not taxable. It is important to note that although New Zealand does not have CGT, there is legislation in place which can result in land transactions being taxable (i.e. classifying the property as on “revenue account” instead of on capital account). 

From an income tax perspective, proceeds derived from land transactions can be taxed if caught under any of the land provisions in subpart CB of the Income Tax Act 2007. Taxpayers may generally be aware or have heard that if you are in the business of property trading, or if you are a developer, your property transactions are generally taxable.

Taxpayers may also be generally aware of the bright line test which taxes gains on the sale of  property where the purchase agreement was entered into on or after 1 October 2015 and the property is sold within 5 years (or two years if purchased prior to 29 March 2018). 

However, there are other land provisions which taxpayers are not so familiar with. For example the intention/purpose test looks at your intention/purpose at the time of purchase.  If at that time your intention includes an intention or purpose of disposal, gains on sale may be taxable (there are some exemptions that may apply).  Note that this intention or purpose does not need to be a dominant intention or purpose, but it does need to be something that is more than a mere contemplation.  Note that it also does not matter if latter your intention changes.  Consequently if you do acquire property with an intention or purpose of sale, but later change your mind that is not relevant.   

In addition it is important to note that this is a subjective test and this provision has no limit on the timeframe (unlike many of the land provisions that have a 10-year rule).

CAPITAL GAINS AND REZONING

Another land provision that people can be caught under is what is more generally referred as the rezoning provision. This provision can tax the gains on sale if at least 20% of the gains is a result of a change affecting the land (i.e. rezoning or granting of resource consent) or the likelihood of such change, and the sale is within 10 years of purchase.  For example if you acquire property for say $1m and two years later the operative district plan allows for a rezoning of that property which you then sell to a developer for say $5m, it is likely that the $4m gain will be subject to tax.  A deduction of $800,000 would however be available for the two years the property has already been owned.

Another example of an often overlooked area would be the tainting provisions. If at the time of purchase, you are associated with a trader or developer, and you sell the property within 10 years of purchase, your sale would be of tainted property and the proceeds may therefore be taxable (some exemptions apply). There is also a similar provision for association with a builder, but the 10 years commence from the completion of improvements made to the property rather than at the time of purchase. 

CAPITAL GAINS AND ASSOCIATED PERSONS

You should also be aware of land transactions made between associated persons. If you made a gain upon the sale of a property that you had purchased from an associated person, and the gain would have been income to that person (the transferor) under any of the land provisions should the transferor had retained and disposed of the land, then any gains that you made from the sale will also be taxable.

Once determined that a property sale is taxable, you will then consider whether any exemptions are available to exempt the sale from tax. Determining whether a property sale is taxable is always on a case by case basis and given that land transactions generally involve high dollar value, it is important to seek professional advice when taking a tax position that the gains from a property sale is in fact a capital gain.

CAPITAL GAINS AND IRD

It is relatively easy for the Inland Revenue to identify the parties to property transactions. A simple search of the address on Land Information New Zealand will provide details of a property transaction (i.e. dates, names of the parties and IR numbers). Furthermore, IR has the power to request information from third parties (i.e. banks, lawyers, foreign government etc.). It is also important to note that the onus of proof generally lies with the taxpayers and not the IR. As we all know, IR reviews and audits are costly, therefore obtaining professional advice prior to taking a tax position may give you a peace of mind and basis for any future arguments with the IR. At times, it is beneficial to seek advice prior to purchase rather than sale to avoid any unexpected tax consequences.

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Authors

Lisa Murphy
Tax Partner - Auckland
Grace Wee
Tax Specialist - Auckland