Tax Updates: 1 July 2024

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

Does your subdivision project have GST implications?

A large component of the tax advisory work I do surrounds subdivision projects undertaken by an Average Joe (someone not involved in any land-related type business), who wants to know (hopefully in advance of actually ‘commencing’ the project!) whether they will have to pay income tax for any subsequent disposal of the newly divided, and perhaps developed, land.

I would suggest that in these cases, nine times out of ten, your Average Joe has not considered the GST implications of their project. The two tax types often do not go hand in hand—you could be exposed to paying income tax on the disposal but not GST, or vice versa.

Well, the leading case on whether a subdivision may be considered a taxable activity for GST purposes is still the 1995 Court of Appeal decision in Newman (Newman v CIR (1995) 17 NZTC 12,097 (CA)). Pre Newman, it should be noted that almost all subdivisions were found to be taxable activities. However, after the court finding for the taxpayer in Newman, Inland Revenue (IR) kindly issued a policy statement in Tax Information Bulletin Vol 7 No 2 (August 1995), titled ‘GST and subdivisions – Court of Appeal decision in the Newman case.’

Other than the occasional comment in other releases since then, it’s been nearly 30 years since the Revenue has updated the post–Newman guidance; however, they’ve finally done it with the recent release of QB 24/04. I’d suggest that the new QB is well worth reading if you are involved in this space. It’s a 25-page document, but a relatively easy read in my view (although perhaps I’m biased because I’m reading this stuff for breakfast).

Now, understand that QB 24/04 will not provide the magic answer to all your questions. Sure, it suggests that a subdivision leading to a single one-off supply is not likely to ever amount to a taxable activity for GST purposes, while a four-lot subdivision will likely have the opposite outcome. However, it equally suggests that the opposite could also be true based on the actual fact set. So, the answer to your question of whether your subdivision project had GST implications is indeed a question to be answered by considering the specific facts of your particular case.

My core takeaways from the recent guidance are:

• A key starting consideration is whether your subdivision would be deemed as being carried on ‘continuously’ or ‘regularly’, and is there an intention upon its completion to sell the divided lots to another person? If you do not intend to sell, say you plan to retain all developed lots as long-term residential rentals (residential rental an exempt supply for GST), then it is unlikely you will be deemed to be carrying on a taxable activity;

• To answer the ‘continuous’ or ‘regular’ question – how many lots will be created and sold, and what level of activity is involved in your project?

• In general terms, an activity is carried on continuously if it is carried on over a period, in a sequence uninterrupted in time or if it is connected. An activity is carried on regularly if it is carried in accordance with a definite course or a uniform principle of action or conduct or if a proper correspondence exists between the elements of the activity;

• When the subdivision activity leads to one supply, a very high level of activity is needed for the activity to be continuous or regular. When the subdivision activity leads to four or more supplies, only a low level of activity is needed for the activity to be continuous or regular. When the subdivision activity leads to two or three supplies, considering the level of activity involved will be particularly important;

• Level of activity involves a consideration of the scale of the subdivision, the level of development work, the time and effort involved, the level of financial investment, and the level of repetition (the QB discusses each of these factors in more detail); and,

• Factors not likely to be relevant when answering the level of activity question are commerciality, activity before there is an intention to make supplies, and actions that relate to subdivided land not used for making supplies (my earlier example of the residential rental scenario).

The statement ends with a fair number of examples to illustrate the commentary; however, as always, if you do get stuck, I’m here to help.

This article was originally published through the ‘A Week In Review’ newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.