Taxation of Land Transactions
Many taxpayers are familiar with the fundamental principal that gains from land acquired with a purpose of intention for resale are subject to income tax. These rules have also recently been strengthened with the new Bright line two year hold test that puts a definite line in the sand with regards proving intention.
There are however seven other major taxing provisions besides CB 6 that deals only with intention that can serve to tax a land transaction. Taxpayers looking to develop or subdivide land need to be familiar with all of them. Interpreting these taxing provisions is further complicated by a raft of exemptions that apply to each provision. This commentary deals with just the taxing provisions, not their exemptions.
Purpose or intention of sale (CB6)
Taxes gains where land acquired with an intention to re-sell. To apply the intention to sell must have been present at acquisition. If there is more than one intention, sale does not need to be the dominant one for the taxing provision to apply. There is no time limit on how long you own the property, if acquired with sale intent, it’s always taxable. This section applied even if land is held more than two years.
Business relating to land (CB7)
A business of dealing in land is someone who buys, sells, or exchanges land without necessarily altering it. The section relates to land acquired for the business and has no time limit between purchase and sale. To be in business though you must apply a reasonable amount of effort and would generally have multiple transactions. A business relating to land can include developing buildings on land.
Other land owned by dealers (CB9)
Taxes gains on land held for less than ten years even if not acquired for the land dealing business. Extends to include land held by associates of the dealer. Applies to land acquired at the time the dealer operated their business.
Developers other land (CB10)
Applies to taxpayers in the business of developing or dividing land. This section taxes gains on properties they hold for less than 10 years even of the property was not part of the land development or division business. Includes the developer’s associates.
Builders other land (CB11)
A builder is somebody in the business of erecting buildings. The section taxes gains on land not necessarily part of the builders business. This land can be taxed if sold within ten years of them having completed improvements to the building, Associates of builders also caught by the section.
Development or division commenced within ten years (CB12)
This is the important one for all investors with sub dividable rental properties. Applies where an undertaking or scheme is entered into within ten years of acquisition of land that results in the land being divided into lots. To apply, the work must be more than minor but the courts have set the bar very low. A simple boundary realignment that does not create more lots is included within the section. Residual land held after a subdivision may still be untaxed and treated differently from lots sold.
Major development or division (CB13)
This section only applies if you aren’t already caught under a previous provision. The taxpayer must have undertaken significant expenditure on earthworks and roading. There is no ten year time limit on this section.
One saving grace is that a deduction of the market value of the land before the development commenced is given so only the development profit is taxed. Get a valuation before you start!
Rezoning gains (CB14)
Taxes the gain on land if the gain was caused 20% or more from a zoning change or the granting of a resource consent. The amount of taxable income though is reduced by 10% for each year the taxpayer has owned the land.
Goods and Services tax
Developing and trading property continuously and regularly can also require you to be GST registered. Subdividing one lot into three can be all that is required for you to register for a subdivision project.
Lots of scenarios and tax implications. Find out beforehand which way you are heading to avoid unnecessary tax.