© Baucher Consulting Limited November 2013 All rights reserved. The taxation of property transactions in New Zealand November 2013 Terry Baucher, Baucher Consulting Ltd
Nov 11, 2014
© Baucher Consulting Limited November 2013 All rights reserved.
The taxation of property transactions in New
Zealand
November 2013Terry Baucher, Baucher Consulting Ltd
© Baucher Consulting Limited November 2013 All rights reserved.
The taxation of property transactions in New Zealand
Focus on income tax and three topics:
1.New Zealand does have a capital gains tax on land sales
2.You can be taxed on a land sale because of who you are “associated” with
3.The IRD’s Property Compliance Programme
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When is the sale of property or land taxable?
Focus today is on disposals of land by someone who does not carry on business as a dealer in land, developer or builder
The Income Tax Act 2007 has nine sections which treat disposals of land as taxable
“Disposal” means all transfers of land, not just sales
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When is the sale of property or land taxable?
Key transactions are as follows:
1.Land acquired for purpose or with intention of disposal;
2.Land disposed of within 10 years of acquisition AND acquirer was associated with dealer in land, developer or builder at time land acquired;
3.Land subdivided within 10 years of acquisition
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Land acquired for purpose or with intention of disposal
Section CB 6 of the Income Tax Act 2007
Two key components:
1. Land acquired for the purpose or with the intention of disposal; or
2. Land acquired for two or more purposes or intentions, one of which was to dispose of the land.
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Taxpayer’s “purpose” Purpose is determined at time of purchase
Therefore vital to document purpose BEFORE purchase
Facts such as what was said to real estate agent, lawyers, and lenders very important
Purpose of disposal not the same as a future possibility of sale in the right circumstances
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“Purpose of disposal”Three main considerations about determining a
taxpayer’s purpose:
1.Purpose or intention of disposal must exist at time land acquired;
2.Taxpayer’s purpose or intention at the date land is acquired is a subjective one. Therefore evidence is important;
3.Purpose of disposal does not have to be the dominant purpose for acquiring the land.
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“Associated persons” and land disposalsSeveral sections (CB 9, CB 10 and CB 11), tax land
disposals made within a certain timeframe where the vendor was “associated” with either a dealer in land, developer or builder
The “Associated Persons” tests are complex but are designed to stop dealers in land, developers or builders avoiding income tax by using a relative or different structure to buy and sell property
The associated persons tests apply to individuals, trusts, companies and partnerships
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“Associated persons” and land disposalsThe associated persons test will apply
where:
1.A person acquires land; AND
2.At the time of acquisition the acquirer was associated with a dealer in land, developer or builder; AND
3.The land is disposed of within 10 years.
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Associated Persons: example – two persons Test
Two persons are associated if:
They are married, in a civil union, or in a de facto relationship
One is an infant child of the other (i.e. Under 20)
Not associated if person cannot be reasonably be expected to know that the other person exists or that they are within two degrees of blood relationship
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Associated persons and land disposals: Example 1
March 2003 April 2005
Started property
development business
Investment property acquired
August 2012
Sale NOT taxable as property acquired when NOT a developer or associated with a developer
Investment property
sold
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Associated persons and land disposals: Example 2
March 2003 April 2005
Started property
development business
Investment
property acquired
August 2012
Sale TAXABLE as property acquired when a developer or associated with a developer
Investment property
sold
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Associated persons and land disposals: Example 3 - Builders
March 2003April 2005
Bach completed
Landacquire
d
August 2014
Sale TAXABLE as property sold within 10 years of COMPLETING improvements
Bach sold
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Land subdivisionsSubdivision of property is taxable if:
• An undertaking or scheme is carried on; AND
• The undertaking or scheme involves development or division; AND
• Development or division work is “not minor”; AND
• The undertaking or scheme is BEGUN within 10 years of acquisition.
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Land subdivisions
“Not minor” – each case is different and depends on reviewing following factors:
1.The importance of the work in relation to the physical nature and character of the land;
2.The total cost of the work in both absolute and relative terms;
3.The nature of the professional services required;
4.The nature of any physical work carried out.
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Land subdivisions
No clear rules, each case viewed on its facts
The more physical work and professional services involved, the more likely to be treated as “not minor” and sale proceeds therefore taxable
March 2003 April 2012
Subdivision
begun
Landacquire
d
August 2014
Subdivided land sold
Sale TAXABLE as subdivision BEGUN within 10 years of acquisition
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ExemptionsFollowing exemptions may apply:
1.If house was principal residence;
2.If land is premises of business used to carry on a “substantial” business;
3.Subdivisions for use in, and purposes of, carrying on of a business on the land;
4.Land for investment purposes;
5.Farmland.
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IRD Property Compliance Programme (1)
1. Property Compliance Programme (“PCP”) is the most important IRD audit programme
2. Established in July 2007 as a three year initiative to “enforce and improve compliance in area of property taxation”
3. Now has 60 investigators in 8 sites across New Zealand with management team based in Manukau
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IRD Property Compliance Programme (2)
4. In its first three years PCP contacted 50,000 taxpayers raising over $83 million in extra tax
5. The PCP uses the IRD’s investigative powers to gather and analyse data for land sales
6. It also routinely requests information from banks and other Government agencies such as Immigration and Ministry of Social Development
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IRD Property Compliance Programme (3)
7. PCP analyses property transactions to identify speculative activity and trading
8. Looks for patterns of buying and selling; monitors areas where particularly strong activity such as Flat Bush, Redhills and Takanini
9. Reviews historical GST claims where little subsequent activity
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IRD Property Compliance Programme (4)
10.PCP also notes transactions where either a power of attorney of teenagers are used to complete a sale and purchase agreement
11.Uses this data to place an alert on properties of interest
12.If PCP decides to launch full review the onus of proof is on taxpayer
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PCP – Property Alerts
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IRD Property Compliance Programme:
Investigation examples (1)1. Person A bought and sold a bare section within 6 months realising a $80,000 profit
2. When investigated taxpayer said land was unsuitable for a 4 bedroom home
3. Investigation found subsequent purchaser built a 4 bedroom home on same land.
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IRD Property Compliance Programme:
Investigation examples (2)“I sold it because it was only two bedrooms and it was not suitable for a family of four”
1.Did he not know he had a family of four?
2.Why did he purchase two other two bedroom properties?
3.Taxpayer bought and sold 18 houses in 3 years, and claimed no intent of resale
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Conclusions
1. Land taxation complex area and easy to trip up. Important to get proper advice.
2. Vital to clearly document intentions BEFORE purchase.
3. IRD Property Compliance Programme very active and aggressive in Auckland.
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Questions?
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For further information please contact Terry Baucher
09 486 6200
www.baucherconsulting.co.nz