When does the sale of property or land incur tax?
Although New Zealand doesn’t have a formal capital gains tax, there are situations where the sale of property and land becomes taxable. In addition to the bright-line test, several triggers may make your land sale taxable:
- If you bought the land with the intention to sell it.
- If you’re in a land related business or associated with someone in a land related business (dealers, developers, subdividers, builders).
- If you’ve subdivided/developed the land or the land has been rezoned.
Subjectivity, objectivity and timeframes can all be important depending on the situation.
Circumstances can matter
The bright-line test was originally introduced to improve clarity around when property sales were taxable, curbing property speculation. It still functions to tax residential property sold within a set period, however that period has changed over time. The test is a blunt instrument, it doesn’t care why you sold the land, it only cares about timing (although don’t forget the exclusions).
As a rule, “the facts and circumstances are really important when selling a property. For example, when was the property acquired for tax purposes? The tests also have a range of exclusions that should be worked through when considering selling land or property. Be careful when applying them, for example the residential/main home exclusion for one, can be different for another,” says BDO Head of Tax, Iain Craig.
Read more about the bright-line test here.
Losses on land sales
Not every property or land sale will result in financial gain, so what about a loss on a sale, can you claim it?
“If you fall under one of the taxing provisions and a gain would be taxable, then generally speaking, a loss would be deductible as well,” says Alan. “However, if the loss relates to brightline residential property, you may not be able to offset it against other income due to the loss ring-fencing rules.”
Associated persons rules
When selling property or land, you should also consider the associated persons rules. These effectively mean that if you’re associated with someone in a land related business, such as a developer or builder, you may be liable for tax on your property sale. The associated person rules are often referred to as ‘tainting rules’.
“These rules can catch people out, as the default thinking is there is no capital gains tax in New Zealand. Anyone buying property needs to take advice if they’re closely linked with someone in the business of dealing, developing, subdividing land or erecting buildings. The test of association is applied widely, so a close link could mean tainting,” says Mark.
Timing is everything
While it’s important to understand your tax obligations when buying and selling land and property, it’s also worth exploring the factors that you can influence. For example, if you’re considering selling property when you’re close to the 10 year threshold, waiting a few months before selling could make a big difference.
“In terms of timing and tax planning, you do have some control,” says Mark.
GST fish hooks
Sellers of property or land may overlook GST, but it can apply when their activity is a GST related activity (such as a subdivision) that exceeds the $60,000 turnover threshold. Also, there are considerations that need to be made around compulsory zero-rated transactions and transactions with GST-registered persons.
“There are a whole lot of fish hooks and you can end up inadvertently overlooking something and get it wrong, so advice around GST is also really important,” says Alan.
Exemptions and relief
While the tax landscape for property and land sales can be complicated, there is some relief:
- If you've held land for more than ten years and you engage in a taxable major subdivision, you reset cost to market value at the start of that subdivision for the purposes of calculating taxable income. For example, in economic terms, if you bought land for $100 and sold it for $1,000, you’ve made $900. If you are subject to tax under this provision and the market value is $400 at the time you started the subdivision, the taxable gain is $600 (as “cost” for tax purposes is increased to $400 from $100).
- If you’re liable to pay tax under the rezoning provision, you get a deduction of 10% for each full year you’ve held the land.
- Your home remains your castle and the ‘main’ or family home is generally excluded.
Seeking advice
If you’re considering buying, subdividing/developing or selling land, seek expert advice early to avoid costly surprises.
Reach out to your local BDO adviser or explore our full range of tax services.
Watch more insights in our Eyes on Tax video series, covering topics including tax residency, expanding your business overseas and trustee tax.
