Don’t get caught out with a capital gains tax

Property is a favoured investment in New Zealand due to the historical solid growth and given New Zealand’s lack of a broad-based capital gains tax (at least historically), these gains have often been derived tax free.

Most probably due to this lack of a capital gains tax, there exists a common belief that gains from property transactions are never taxable. Whilst this is true in the majority cases, there remains certain situations where the gains are moved from a capital account (non-taxable) to a revenue account (taxable).

These circumstances are those which fall into the provisions of ‘subpart CB’ of the Income Tax Act 2007. This deals with taxpayers who dispose of an interest in land or buildings while being in the business of property development, trading or building.

If you sold it too soon, you’ll pay tax on the profit you made

You will no doubt be aware of the bright-line test which was enacted in October 2015 and then strengthened in March 2018. The rule basically applies an assumption that if you sell a property which is not your own home within five years (two years for properties purchased pre-March 2018) of when the interest was acquired, and/or substantial work was carried out on the property, then you have brought or developed the property with the purpose of on-sale. In such a case, subject to some limited exemptions, the IRD will require the seller to pay tax on any profit.

What were your intentions?

Additionally, there are many other tests within subpart CB which are especially relevant for those within the construction and development industries. A key one of these is the intention test, which basically says that if you acquire an interest in land with the intention to sell at some stage in the future, then any gain is always taxable regardless of when the sale occurs.

It’s important to note that the intention test is highly subjective, and the IRD have previously stated that if it were to rely on the intention test to deem a transaction taxable, they will place weight on the notes held by banks, lawyers and other professionals from the time of purchase. Also, the intention test has no time period unlike many of the other taxing provisions. It basically treats the purchase and sale of the land like any other item purchased for resale, e.g. food for sale at a supermarket.

It even applies to your own home

Another key consideration for those in or associated to someone who is in the building industry is that even the profit on your own home can be deemed to be taxable if you were to sell it within ten years of acquisition. This is regardless of your initial intention or the amount of work you may have carried out on the property while it was in your ownership.

by Rod Grant
Business Advisor

Please note that the examples above are only a small snapshot of the situations where a transaction could be deemed to be taxable. They are for information purposes only and cannot be treated as a comprehensive piece of tax advice as every situation is different. We would recommend that you seek independent and specialist advice before undertaking any property transaction, especially if you work within the construction industry.