As soon as the Tax Working Group released their interim report in September 2018, potentially recommending the introduction of a capital gains tax, human nature dictated that there would be those amongst us that would panic, and commence down a path of looking to dispose of any asset, particularly land, that could be exposed to the new tax, should it proceed to be introduced.
While some may argue such behaviour was clearly an over-reaction, and not a logical investment decision based on rational thought processes, unfortunately these potential early-adopters, if that terminology can be used to describe them, were in no way assisted in their decision making, by a Government of the day who had already made it quite clear, that a CGT introduction was very much on their agenda.
However with all that being said, the issue of whether or not NZ may have had a CGT by 1st April 2021, may have clouded somewhat, the rules surrounding land disposals, and exactly when you may still be able to derive a tax-free capital gain upon sale.
To help clear the skies somewhat therefore, the following are some basic principles to understand:
The triggers –
at the time you acquire a piece of land (usually defined as the date you sign
on the dotted line), it can be shown that you did so with an intention or
purpose of resale, then you’ve pulled the trigger and it is taxable now
whenever you sell it (mistaken belief No1 – there is no 10 year rule here). A
subsequent change of purpose or intention has absolutely no impact – you can’t
reverse the trigger.
you’re carrying on a business of dealing in land, or of developing or
subdividing land, or you are associated (legislatively defined) with another
person carrying on one of those businesses, at the time you acquire a piece of
land not for any of those businesses, a subsequent disposal of the land is
taxable if sold within 10 years of its acquisition date (mistaken belief No2 –
there is no retrospective tainting – existing land holdings are not suddenly
tainted because you either commence yourself or become associated with someone
else carrying on one of those businesses).
you’re carrying on a business of erecting buildings or are associated to any
other person carrying on such a business, at the time you commence any
improvements to your land, then the subsequent disposal of your improved land
is taxable if you sell within 10 years of the date the improvements are
completed (mistaken belief No3 – note the date of application of the potential
tainting issue by the building business activity – date you commenced the
improvements to your investment land, not the date of acquisition of the land
as in the previous trigger scenario).
you commence a development of the land or a subdivision of the land, within 10
years of the date you acquired the land, and the work involved in the project
is of more than a minor nature (a relatively low threshold court decisions have
reflected), then the land is taxable whenever sold (mistaken belief No4 – you
do not actually have to complete your project to pull the trigger – you simply
have to commence it).
none of the above tax triggers have got to you by this point, then if you are
selling residential land (as legislatively defined) within 5 years of the date
you are deemed to have acquired the land (again legislatively defined for
different scenarios), then the proceeds of sale of automatically taxable.
you dispose of land acquired within 10 years, and it could be said that more
than 20% of the gain you have made has resulted from a land use change (e.g. a
zoning change by council), then the whole gain will be taxable, although
reduced by 10% for each year you have owned the land.
- If you commence a major project involving significant expenditure to either develop or subdivide your land, then regardless of how long you have owned the land, your project has pulled the taxing trigger. A primary difference under this taxing provision however, is that you get to use the market value of the land at the date you commenced your project as your cost base for determining the profit subject to tax, whereas all of the other taxing provisions use acquisition cost as the cost base.
The exclusions –
Having fired the gun via one of the above tax triggers, you may miss the target still however, if you’re entitled to claim a particular exclusion.
of the taxing provisions have an exclusion where the taxpayer has, or is to,
use the land for their residential purposes, however note that all exclusions
are not equal, and there are instances where the exclusion will not apply if
the land is not owned by a natural person (which does not include a trust, even
where the trustees themselves are natural persons).
have an exclusion where the land predominantly contains a premises from which a
substantial business is carried on by the land owner. A tenancy scenario does not
qualify for the exclusion here.
- There are also more specific exclusions which can apply with regards to farmland or land which will be retained to derive investment income from the land.
While I have written this article in an attempt to part the clouds somewhat, the legislative provisions are certainly not black and white, and consequently the above narrative should only ever be used as a trigger itself to seek further expert advice on the potential issues that may arise for you.
Please do not hesitate to give us a call, if we can assist you in that regard.