Tax Updates: 20 October 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.

What is the actual activity being carried on?

Absent anything of interest coming across my desk in the past week, I thought that this week I would write an article on my favourite taxing topic – land transactions (each to their own, I can hear you all saying).

Almost weekly, I am asked questions surrounding potential tainting issues for a person (in the widest sense to include another company or a trust) who thinks they may be associated with a property developer, and consequently, how will that association affect a potential disposal of their land.

Well, the first step naturally is to check for association, in particular because the associated persons definitions for the purpose of the land taxing provisions is somewhat narrower than the general associated persons definitions. Now, in some ways, if the land-related business is yours, and any non-business land is also yours, then 99% of the time, no matter how you attempt to slice and dice your ownership structures (unless you’re prepared to go over to the dark side), an association will exist – thereby potentially tainting the non-business land.

However, in a case like the one I had just this last week involving a company whose shares were owned 10% each by mum & dad and 80% by their daughter (who was 30), mum & dad were not associated to the company, because even though aggregation applied to mum & dad (so they were deemed to own 20%), it did not apply to the daughter as she was no longer their infant child. Consequently, mum & dad did not cross the 25% required ownership threshold under the person and a company associated person test, and therefore their investment land was not subject to tainting.

Having confirmed that an association does exist, however, the next question I ask is what the business actually does. In other words, how does it make its money (and hopefully a profit)? I ask this question because so often the client says to me that the person carries on a business of property development. The problem here is that the land taxing provisions actually contain no reference to a person carrying on a business of property development, to which you may respond, so what? It’s a land-related business; we’ve confirmed that parties are associated, therefore, I just want to know how long I need to keep my land for to avoid taxation on disposal due to tainting.

Well, the next problem is that there are actually two different tainting rules, and which rule applies depends on whether the business activity is one of dealing in land, developing land and/or subdividing land, or is it a business of erecting buildings.

It is here that I revert back to my earlier question – how does the business actually make its money? Does it involve buying and selling land in exactly the same state (dealer in land), does it involve developing the land to prepare it for its intended use – often to be built upon by the person who buys the developed land (land development), and/or does it involve division of the land into lots for sale (division of land into lots).

If the business is restricted to one of these three activities (or a combination), then the tainting is all about the date of acquisition of your non-business land, and whether at that time you were associated with the business. Where this is the case, usually you need to then own the land for a minimum 10-year period to negate taxation via tainting (unless an exclusion is available to you).

If, however, the business makes its money from constructing buildings upon land (whether the business itself owns the land or the business is contracted by the landowner to build them a new home, for example), then it’s a business of erecting buildings. Now, often it will be the case that the business has acquired a piece of land, developed it (earthworks, perhaps demolished existing structures, etc), perhaps subdivided the land into a number of developed lots, upon which the business has then erected buildings on each lot. The business, however, is not one of land development or of dividing land into lots – the business does not make its money from selling the bare land developed lots. These activities are simply part of the process directed towards the end result, the erection of buildings for sale.

Now, if the business is one of erecting buildings, then just being associated with the business when you acquire your land is actually of little consequence. What matters is whether you plan to make any improvements to your land at any time before you subsequently dispose of the land. If you commence improvements to the land at a time you are associated with a business of erecting buildings, then from the date you complete those improvements, a 10-year tainting period commences. So, dispose of the land within the 10-year tainting period, and you will be subject to tax on the sale unless you can claim an exclusion.

In some ways, therefore, the erecting buildings tainting provision is much narrower than the dealer/developer/divider one. Never undertake improvements to your land, and your association with a business of erecting buildings is of no consequence. However, arguably, this tainting provision is in some ways wider than the other, because there is no minimum ownership period post which tainting will not apply. To illustrate this point, if you have owned your residential investment property for 25 years and you decide to add an additional bedroom to increase the rental value, association with a business of erecting buildings at the time of commencement of those improvements will trigger the 10-year tainting clock commencing from the date the improvements are completed.    

I hope you’ve enjoyed the article and that it has helped explain why, sometimes, it is important to understand exactly what the nature of the activity being carried on by the business is. 

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.