The Inland Revenue is currently seeking feedback on amendments to the land taxing rules as they apply to “habitual renovators”.
Generally, if you buy land with the intention of selling it to make a profit, you will be taxed on the proceeds of that sale. However, there are certain exemptions that apply to the sale of land where it is used by the person as their main home, residence or business premises. In order to be able to argue this exemption applies, you need to show that the person does not have a regular pattern of buying and selling land.
So, in theory, that friend or acquaintance that most of us know who seems to shift house every two years after completing an amazing renovation (only to move onto the next project), should be taxable on the gain on sale of their property as they have a “regular pattern” of buying and selling land.
However, the current rules are quite narrow and so it is relatively easy to get around having a “regular pattern” by say, doing one property in Dad’s name, doing the next in the family trust, then buying a bare section in Mum’s name and building a new house (instead of renovating). In doing so, breaking things up and therefore getting around having “a regular pattern”.
The relative ease at which taxpayers can get around these rules is the Inland Revenue’s concern. Their thoughts at this stage are to extend the “regular pattern” to groups of associated persons – so the scenario above would be caught because the transactions all occur across an associated group which is controlled by Mum and Dad.
The Inland Revenue also want to extend the “regular pattern” to all patterns of buying and selling land used as a residence or business premises. Their view is that it should not matter whether properties were simply bought and sold, or whether any building or renovation work occurred while the person owned the land. Rather, their view is that what should be relevant is that there are transactions which occur at sufficiently uniform or consistent intervals.
While the Inland Revenue go to great lengths to say that they aren’t looking to tax the gain on sale of property acquired or ordinary commercial or family transactions (relocating for work, or to get nearer to a good school for example), we can’t help but make the initial observation that there are a potential myriad of reasons why people might decide to move house, say every 4 years. Given that Inland Revenue have indicated they want to extend the test to people who move regularly but don’t necessarily renovate or build means they may by default capture people who may be moving for genuine reasons at interval periods of time. Should the proposals go ahead, we consider this to be a potential overreach of the land taxing provisions. Although the cynic in me wonders if this is a further move towards capital gains tax by stealth – but that is perhaps a topic for another day!
The Inland Revenue is seeking submissions by 18 October 2019 to its discussion document (which can be found here http://taxpolicy.ird.govt.nz/sites/default/files/2019-ip-habitual-buying-selling-land.pdf). Please contact us if you would like advice regarding how the proposals may affect you, or if you would like to make a submission.