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Disposal of Land – to be taxed or not to be taxed? Part three
This third article, in a series of six, on the various land tax provisions contained within the Income Tax Act 2007 (“the Act”), will focus on the potential application of section CB 6A – Disposal within 10 years: bright-line test for residential land.
As a starting comment, and as a consequence of some responses from readers to previous articles, just a reminder that each of these articles only focuses on a single taxing provision (so others may still have application), and I am only writing with respect to those who are dealing with land but are not themselves carrying on a business of land dealing, land development and/or subdivision, or of erecting buildings, and nor are they associated with any person carrying on one of these businesses.
Section CB 6A, is naturally commonly referred to as the bright-line test. The taxing provision came into effect on 1st October 2015, and is arguably quite ruthless in its potential application – acquire residential land and sell it again within a 10-year period (although reduced to 5 years if its “new build land”), and basically, unless you can claim the main home exclusion, you will be paying tax on any disposal gain you make.
Due to its draconian nature, most advisors jump straight to bright-line considerations when faced with a client’s question concerning their residential land investment. However, it is the third article in my series for a reason, because in the pecking order, it only has potential application if sections CB 6 and CB 12 do not apply in the first instance.
In many ways, the introduction of section CB 6A has made life at the Revenue much easier. Since well before my time, section CB 6 has provided a tool for the Revenue’s investigators to assert that a taxpayer acquired their land with a purpose or intention of disposal, and consequently propose to assess the disposal gains for tax. In this regard, the onus was always on the taxpayer to prove their subjective intention or purpose at the date they signed the agreement to buy the land (as outlined in article one of this series). However, for whatever reason, unless the resale intention or purpose was clearly evident, the Revenue appeared to shy away from pursuing the taxpayer with a section CB 6 application.
When originally introduced, section CB 6A contained a 2-year bright-line period, and this was the position until the present Government decided to extend the requisite ownership period to 5 years, in respect of any agreements to acquire residential land, entered into post 29th March 2018, and then again to 10 years, in respect of agreements to acquire residential land entered into post 27th March 2021.
Lesson number one, therefore – if you acquired your residential land before 29th March 2018 (you signed the binding contract effectively) and still hold that land, then the bright-line rule has no application to you. For example, if you signed a binding agreement on 1st March 2018, with settlement and title transfer to you occurring on 1st May 2018, your bright-line period would end on 30th April 2020, not 30th April 2023. So, confirming the date you “acquired” the land is the first critical step to determining which bright-line period may actually apply to the land.
The first step in determining whether section CB 6A could have application to you, is consideration of the definition of residential land contained in the Act. If you are able to show that your land is not residential land as defined, then the taxing provision has no application.
So what is residential land? The Act defines it to be:
- land with a dwelling on it;
- land for which the owner has an arrangement relating to the erection of a dwelling; or,
- bare land that may be used for erecting a dwelling under rules in an operative district plan.
Excluded from the definition, however, is farmland and land used predominantly as business premises.
Lesson number two – it is unlikely that your investment lifestyle block in the country will qualify as farmland, and the Revenue has issued some guidance in this regard, in QB 18/17, so be aware. Equally, renting your residential land that contains a dwelling, even if you own a number of properties and manage all the rental activities yourself (suggestive you may be carrying on a business of renting), will not qualify as business premises.
It is also necessary to consider what is a “dwelling”, because if your land has a structure on it that would not be considered a dwelling, then arguably it is not residential land as defined. In this regard, a dwelling is defined as:
“any place used predominantly as a place of residence or abode, including any appurtenances belonging to or enjoyed with the place, but does not include a hospital, a hotel, motel, inn, hostel, boarding house, convalescent home, nursing home, hospice, rest home or retirement village (except to the extent that, in relation to a relevant place, it is, or can reasonably be foreseen to be, occupied as a person’s principal place of residence for independent living) and a camping ground”
Specifically included in the definition is a serviced apartment for which paid services in addition to the supply of accommodation are provided to a resident, and in relation to which a resident does not have quiet enjoyment, as that term is used in section 38 of the Residential Tenancies Act 1986.
One point I would like to raise with respect to the dwelling definition is its potential application to, say, a holiday home. While the Revenue’s likely view is that section CB 6A would have an application to your holiday home, for those of you out there who may like to be a little more aggressive with such an assertion by your friendly investigator, you may wish to challenge this view on the basis that the meaning of the words, “place of residence or abode” as they have been interpreted historically (particularly by the Revenue itself) should only apply to places where somebody is occupying the premises as their residence or abode, which suggests some type of permanence, in other words, long-term occupation, not visits of short duration.
Having come to a conclusion that you do indeed own residential land as defined, the next step is to determine your likely bright-line period – as once you have this knowledge, making a call to dispose of your land within the period, is effectively an informed decision to make a donation to the Government’s coffers.
Now to mitigate the chance of putting the reader to sleep, I am only going to summarise the rule that applies to a standard purchase of land in this article, but acknowledge that there are a number of iterations (say you buy “off the plans”), so if you would like some clarification in this regard, please do not hesitate to reach out to me.
Under the standard rule, the bright-line period commences when the land transfer is registered in your name, and you obtain the legal title. From that date, you need to hold the land for 10 years (reduced to 5 years, however, for new build land), before you enter into a binding contract to sell the land. Therefore, make sure you note the difference – commencement date based on the title transfer date (arguably, it would be the settlement date in most cases), end date based on the date you put pen to paper and bind yourself to an agreement to sell.
So I have mentioned “new build” land a couple of times now. This definition was introduced to ensure that while the standard bright-line period was increased to 10 years, the change did not negatively impact investment in new housing supply.
Residential land will qualify as new build land, where it is land that has had a self-contained
residence or abode added to the land, or a place on the land converted to a residence, and the code compliance certificate (CCC) for the residence was issued on or after 27 March 2020. Now note that there are potential apportionment issues triggered where there is an existing dwelling on the land (CCC issued pre-27 March 2020), to the extent that some of your land may be considered new build land with a 5-year bright-line period, while the remainder will have a 10-year bright-line period.
A 5-year bright-line period will continue to apply to residential land where the land:
- is new build land;
- is acquired before, or no later than 12 months after, it became new build land; and,
- there is a self-contained residence (new build), as described in the definition of new
build land, on the land when it is disposed of or when settlement occurs, unless the
new build was destroyed by a natural disaster or fire.
Lesson number three – your land does not have to qualify as new build land when you acquire it. It simply needs to satisfy the definition when sold – so you could have bought bare land, and as long as you have added a self-contained residence by the time you sell, a 5-year bright-line period will apply.
Lesson number four – if you decide to subdivide your residential land (and you can avoid application of section CB 12 as discussed in my second article), the commencement date for bright-line purposes is not restarted by the issue of the new titles – it remains the date the title to a single lot of land was registered in your name.
So you’ve potentially triggered the application of section CB 6A, by disposing of your residential land within the 10-year period (5 years if new build land or acquired pre-27 March 2021). You’ve had a financial setback, for example, and have no option but to sell – which has no relevance for the purpose of the taxing provision, unfortunately (I did say it was draconian after all). Can you claim an exclusion?
In reality, for most of us, the only available exclusion is the “main home” exclusion. If you can show that the residential land was occupied by you as your main home, then the taxing provision may not apply to you.
A few things to note with respect to the main home exclusion:
- Firstly, there are now two main home exclusions; one applies to you determined by the date you acquired your residential land (remember date of acquisition is not the same as the date the applicable bright-line period commences). If you acquired the land pre-27 March 2021, then the old main home exclusion test will need to be considered. Otherwise, for post-27 March 2021 acquisitions, you need to consider the new main home exclusion test;
- Secondly, a person can only have one main home at any point in time; and,
- Thirdly, the main home exclusion can apply to residential land owned by a trust which is occupied by the beneficiaries of the trust as their main home, however only if the primary settlor (person who has given the most to the trust) does not also have a main home outside of the trust.
Lesson number five – it is critical to understand, that in order to claim the old main home exclusion, you must have occupied the land as your main home for more than half of your ownership period, and the land area itself must be more than 50% used for the main home purpose. It is of no use to you, therefore, in attempting to claim the main home exclusion, occupying the land as your main home in the last 12 months of a 48-month ownership period, where for the first 36 months, it was occupied by residential tenants.
While the old main home exclusion test was essentially an all-or-nothing test, the new test, primarily introduced due to the extended length of the bright-line period, is arguably more flexible. The test can be relatively complicated in its application, so to keep things as simple as possible for the purpose of this article, basically, as long as the land is predominantly used for main home purposes and periods of non-main home use do not exceed 12 months at a time, then the main home exclusion should apply when you dispose of the land within the applicable bright-line period. Not satisfying both of these conditions, some bright-line tax is likely to be payable, calculated on a time or area basis.
Finally, if all else has failed and you have reached the point that section CB 6A will apply to your disposal, there are a couple of things to note regarding calculating the loss or gain to be declared to the Revenue. Firstly, normal tax deduction rules will apply in determining the types of expenditure which you can claim – usually the original acquisition price paid for the land, fees charged by solicitors, valuers, surveyors and real estate agents, the incidental costs of disposal and the cost of capital improvements which you have made. Secondly, however, unlike the other land taxing provisions, section CB 6A contains both a deduction cap and a ring-fencing rule – the former limiting your deduction claim in the year of disposal to the level of income reported under any of the land taxing rules, and the latter with respect to any excess deductions you then carry forward to the following income year, restricting the future offset of those excess deductions also to income assessed under the land taxing provisions.
Consequently, if you are subject to taxation under section CB 6A, I would suggest that you consider taking a position that section CB 6 potentially applies instead (you acquired the land with an intention or purpose of disposal), as this taxing provision has neither a deduction cap nor a fence, and remember that it does come first in the pecking order.
Final lesson and very important – do not get caught out by the transfer of ownership trap. While most of the land taxing provisions recognise the ownership period of the associated vendor for the purpose of determining the likes of the application of a 10-year rule for example, a transfer of ownership between associated parties under the bright-line rules may restart the bright-line clock.
Now since I wrote the first version of this article, new roll-over relief provisions have been enacted, where if the legislative conditions are satisfied, the purchaser could, in essence, step into the shoes of the vendor, obtaining the benefit of the vendor’s original acquisition date (thereby avoiding a restart of the clock). Again, the application of these roll-over relief provisions can be fairly complicated, and consequently, specialist advice should be sought in advance of effecting any change in ownership, to ensure that you will qualify for the relief provided.
Well, until next time, I hope you enjoyed the article, and as always, if you have any questions or concerns, please reach out, and I will be more than happy to provide an opinion for you.