When is your land sale taxable?

Did you know…that while New Zealand does not have a comprehensive capital gains tax system, we do have wide ranging rules that will tax land sales.  When is your land sale taxable?

Bright-line test 

This is as close to a capital gains tax as you’ll get.  It’s largely an objective test, until you get into the nitty gritty of the “main home” and “farmland” carve-outs.

The Bright-line test will tax sales of residential property (and excludes farmland and land used for business premises) if sold within five years of when you bought it (it was a two-year test for land bought before 29th March 2018).

Clearly date of purchase and sale are important.  There are exceptions, but generally the purchase date is registration of title and sale is the date the person enters into an agreement to sell the property (such as a conditional sale and purchase agreement).

The concept of your “home is your castle” stands and your main home is not subject to the rules.

We have compiled below a list of common questions we’ve seen on the application of the Bright-line rules:

How does the main home exclusion work for property owned in trust?

If a beneficiary occupies a trust property as their main home, then the exemption will apply if a principal settlor of the trust does not have a main home, or it is the main home of the principal settlor. A principal settlor is the person who has given, financially, the most to the trust.

I’ve got two main homes. Can I use the exemption for both?

No. For the purposes of this rule, the main home is the one you have the greatest connection with. In confirming this, you should be thinking about:

  • Where you spend most of your time;
  • Where your immediate family live;
  • Where your social, business and economic ties are strongest;
  • Use of the home;
  • Where you keep your personal property.

Can I use the main home exclusion over and over again? I have moved four times within the last two years.

Unfortunately, you can’t use the main home exclusion over and over again. The rules state that the main home exclusion is not available to a person who has used it twice or more in the two years immediately prior to the current sale. The exclusion is also not available if a person has engaged in a regular pattern of purchasing and selling the main home.

I’ve inherited the family bach, that’s been in the family since I was little. I’ve never liked it and want to sell it. Do I have to pay tax under Bright-Line?

No. The Bright-line test does not apply to inherited land.

Intention or purpose of resale 

The forerunner of the “Bright-line” test, is land that was purchased with the intention or purpose of resale.  This provision is also aimed at the property speculator, except is harder to prove due to its subjectivity of application (hence the perceived need for the “Bright-line”).  This test examines the mind of the taxpayer at the time of the purchase and seeks to tax those that have a pre-determined plan of sale; it does not seek to penalise those who purchase land with the mere hope it will prove to be a good investment on a future sale.

It's important to note that actions and words to others can speak louder than words to Inland Revenue.  Just asserting that you did not acquire something for sale is not necessarily sufficient.  In building a position, in our experience, Inland Revenue will certainly go further than your words to them and will focus on the circumstantial information available at the time of the purchase, your actions and what you said to others. 

For example, what information does the bank or lawyer hold?, is finance on the property short or long-term?, how long was the property held for (five years and one day?), what were the reasons for the sale (is there a valid change in circumstances?), how did the sale come about (was the land owner approached with an offer they could not refuse, or did the land owner initiate the sale?)

There are various exclusions for an individual’s home and/or for property that is used for business premises.  Caution must be taken when applying these exclusions.  For example, if you establish a regular pattern of buying and selling your personal home, then the exclusion cannot apply.

Business relating to land

Land acquired for business relating to land is subject to taxation on sale.  Businesses include dealers, developers, subdividers and builders, i.e. you buy land to sell, or to develop and sell or to subdivide and sell, or to build on and sell.

The rules contemplate that a person may both be in a business relating to land, but also wish to hold land as a long-term investment.  However, the long-term investment land must be held for at least 10 years (with modification for builders – discussed further in the next section) for it not to be taxed.  The presumption is that land held for less than 10 years was purchased for the business purpose. 

Persons associated or closely connected

Did you know that the actions of another can impact the taxation of your land holdings, if that other person is closely connected (or “associated” to use correct terminology) to you? These rules provide that a sale land is taxable if:

  • At the time you purchased the land you were associated with a person in a business relating to land; and

  • The land was sold within 10 years of acquisition.

The rules are modified for persons associated with building businesses, in this case a sale of land is taxable if:

  • Improvements were completed on the land; and
  • At the time the improvements commenced you were associated with a person in the business of building on land; and
  • The land was sold within 10 years of completing the improvements.

Association is widely considered; if you think you are associated then you probably are.  It is drafted to include common associations.  For example, if John is associated with Land Dealing Limited and Land Dealing Limited is associated with Land Investment Trust, then Land Investment Trust is associated with John due to the common association with Land Dealing Limited.

Exclusions can again apply to personal residential land and land used as business premises.

Subdivisions/development starting within 10 years of acquisition

This rule is currently highly subjective in application.

Under this rule, sales of land are taxable if:

  • The land was subject to a subdivision or development scheme; and
  • The scheme started within 10 years of acquisition; and
  • Work involved was more than minor in nature.

It does not take much for work to exceed the minor nature threshold.  In considering the threshold various factors are taken into account including time, effort and expense.  We are aware that there is a current proposal to consider introducing a threshold in determining “more than minor” to provide greater certainty of application.  For example, work would be more than minor if the cost exceeded, say, $50,000.

Common issues include:

When does a scheme to subdivide commence?

Commencement will depend on the facts of the case, but broadly refers to the first positive or overt act to implement the scheme. It does not necessarily refer to a physical step (such as the first hole in the ground), and could be the drawing up of detailed plans.

I started a subdivision, but did not finish; is the land still taxable?

It is possible to abandon a scheme, the taxation impact will be fact specific.

I subdivided land from one into four sections. I’m going to keep two and sell two. I’m happy to pay tax on the two for sale, but it doesn’t seem quite right that I’d have to pay tax on the remainder.

A good point. Inland Revenue has confirmed that residual land (being land that is the product of a subdivision and not for sale) would not be subject to taxation. Of course, if you sold within a relative short-time period of completion, it would raise doubt as to your stated motive (of retention). Documentation of intention at the outset is important here.

Exclusions will again apply for residual land that is not subdivided for sale or for farmland (subject to specific criteria).

“Rezoning” provisions

For this provision to apply the landowner does not necessarily need to action or implement anything; it is what the law does, or may do, to the land.

Sale of land are taxable under this provision if:

  • The land was subject to a change, or likely change under the Resource Management Act 1991; and
  • At least 20% of any increase in value of the land can be attributed to the change or likely change; and
  • The land was sold within 10 years of acquisition.

This provision does however provide for a taper relief.  For each full year of ownership, taxable income reduces by 10%.  For this reason, this provision will only apply if none of the other taxing provisions apply, with the exception of major schemes (see below).

Major subdivisions/developments

This is a catch all provision and will tax sales of land:

  • Subject to a subdivision or development scheme;

  • Incurring significant expenditure on major land projects.

There is a vast amount of information on what constitutes “significant expenditure” and Inland Revenue concedes that “context” is relevant in determining whether or not this provision would apply.  As an extreme example, a simple subdivision of one into two would not, in the context of this provision, be subject to taxation.  However, a subdivision of one into 20 is quite different (in terms of context).

This provision provides full relief for prior gains in value.  Ordinarily, taxable income is calculated by simply taking consideration on sale and deducting historical cost.  However, for this provision, concessionary treatment applies and “cost” is based on the market value of the land at the time the scheme commenced.  This acknowledges that land could be held for many, many years prior to a scheme commencing.  It therefore will only apply if none of the other provisions could apply in the first instance.

Exclusions are again available for subdivided/developed land to be held for the long-term and specific farmland.