Tax Updates: 10 March 2025

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.

Land acquired for a purpose or with an intention of disposal

Fairly frequently, I am approached by someone considering disposing of land that they own, and they want to know whether or not the residential bright-line rule will apply to them. However, before I can answer that question, I often must educate them on the number of other land taxing provisions that may apply to their situation in the first instance. And that the residential land bright-line rules are actually sixth in the priority pecking order when it comes to the taxation of land transactions.

Contributing to this common misconception, I expect, is the large amount of publicity that the residential land bright-line rules have received recently, so the issue is front of mind for those looking to dispose of their land interest. However, the residential land bright-line rules were, in essence, introduced to support the existing section CB 6 of the Income Tax Act 2007 – land acquired for a purpose or with an intention of resale. Before the introduction of section CB6A (bright-line test), disputes would often arise between the taxpayer and IR (Inland Revenue) over the taxpayer’s “subjective” purpose or intention on the date they entered into the contract to purchase land. This subjective mind, relevant only on that specific date, would determine the subsequent application of section CB 6.

So, to mitigate the chance of IR resources being tied up in “subjective mind” disputes (often for periods exceeding a year), the bright-line rules were introduced: sell within the relevant bright-line period, and the land does not qualify as your main home, then the disposal gain is taxable. Black and white, thank you very much.

However, the bright-line rule only applies when sections CB 6 to CB 12 do not apply, and consequently, one must always consider the potential application of section CB 6 first. If section CB 6 is deemed to apply to the disposal, then even if the disposal has occurred within the relevant bright-line period, section CB 6 will apply to the disposal and not section CB 6A. It should be noted here that having this pecking order in the legislation could be advantageous to your client, particularly in the unfortunate event that they have incurred a loss on disposal – claimable under a section CB 6 application but not under section CB 6A.

IR has considered it timely to provide an updated publication on the application of section CB 6, which is presently in the form of a draft QWBA – “When is land acquired for a purpose or with an intention of disposal so that the amount derived from the sale is income?”

The draft QWBA is referenced PUB00460 and is a 19-page read, with the last six pages dedicated to examples. Its length is somewhat shorter than it might have been, I would suggest, due to references to other document releases on various topics, as opposed to including more comprehensive commentary in the present release. For example, instead of providing in-depth commentary on questions such as what constitutes a ‘regular pattern’ of transactions or when the business premises exclusion applies, the draft QWBA simply refers readers to earlier publication releases that cover these specific items.

I would suggest that the key learnings from this latest QWBA are:

• It is only the subjective intention or purpose on the date the binding agreement to purchase is executed which is critical to the application of section CB 6. If that intention or purpose included disposal (even if there was more than one intention or purpose), then the land is taxable whenever it’s disposed of (forget any 10-year rule, which I find people are always asking about). However, if a disposal intention or purpose was absent, then section CB 6 cannot apply to the subsequent disposal. Even if you changed your mind the day after executing the Agreement to Sale and Purchase (ASAP), and now decided to sell the land as soon as possible. Also, just having a vague idea or possibility of disposing of land in the future will not trigger the application of section CB 6.

• The onus of proof always rests with you – Inland Revenue has the benefit of hindsight and consequently will be looking to test your actions post-execution of the ASAP against what you claim your intention or purpose was on the date of signing. So, if you need to sell the land within a relatively short period, make sure you have evidence of your buying intention or purpose. For example, what did you tell the real estate agent (they commonly ask, so get them to provide a written comment in this regard) or your bank in the days leading up to the ASAP execution e.g. was the offer that led to your unexpected disposal unsolicited?

• Can you claim one of the two legislative exclusions from section CB 6 – was the land used mainly as your residence (different from the main home bright-line exclusion, by the way) or mainly used to carry on a substantial business (note that renting the land is not a substantial business activity)?

• Could you possibly claim what I often refer to as the “non-legislative” exclusion? Did you intend not to sell all of the land (say, post undertaking a subdivision of the land), and can you evidence that? If so, then at least the remainder of the land should not be taxed via the application of section CB 6.

• You cannot avoid taxation under section CB 6 by simply gifting the land instead – a gift is still treated as a disposal and at market value; and finally,

• Be aware if you have acquired the land from an associated party and they paid tax on the disposal to you under a section CB 6 application. This land is now tainted under section CB 15(1) to the extent that when you dispose of the land, you must also pay tax. Even worse, because section CB 15 is an anti-avoidance section, the usual legislative exclusions to section CB 6 do not apply.

So have a read of the draft if it spikes an interest for you, and should you like to make any submissions on the item, you should do so no later than April 11^th.

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.