New Zealanders wishing to enter the property market or to save for their home have often occupied a property while doing it up, then sold it at a profit. Exclusions have meant that the profit made hasn’t been taxed. Now the opportunity to use this process is tightening up.
The Government has recently released a tax policy consultation document, ‘Habitual buying and selling of land’. It indicates an update to the Income Tax Act 2007, which could catch many property owners unaware.
New Zealanders are currently taxed on certain sales of land. However, the rules pertaining to this contain exclusions for people who use that land as their main home, residence or business premises. The Inland Revenue says these exclusions are not intended to apply where the taxpayer has a “regular pattern” of buying and selling land used as a main home, residence or business premises.
Narrowing the exclusions
Consequently, the IRD proposes to narrow the exclusions. Three ways in which this could be done are as follows:
1. Group of persons or entities
The current law relates only to the activities of an individual. So it is easy to get around by trading in the name of a partner or colleague so that the ‘habitual buying and selling’ of a single person is less evident. The Inland Revenue proposes to tighten this loophole. Regular pattern restrictions would apply where a person or a group of people has a regular pattern of buying and selling land they occupy as their main home, residence or business premises. It would also apply to entities, such as trusts controlled by that person or group of people.
2. Similar activities
The regular pattern restrictions in the current law have been interpreted very narrowly to apply only where there is a similarity or likeness between the transactions. For example, if you were to complete three transactions. First buy a do up then sell; next, buy land, build on it then sell and lastly simply buy and sell with no activity on the land. This would not currently constitute a ‘regular pattern’. The Inland Revenue proposes broadening the scope of the regular pattern restrictions to ensure they apply to all patterns of buying and selling land used as a residence or business premises.
3. Time period restrictions
The main home exclusion contains both a regular pattern restriction and a restriction where the exclusion has been used twice within the two years prior to the current sale. The IRD suggests the time period restriction is also extended to the business premises exclusion. In addition, a time-period restriction of more than twice in three years might be appropriate.
Consequences of change
The aim of the proposed changes is to prevent taxpayers from structuring around the current law. However, they could impact on anyone buying and selling frequently over a short period of time. For example, families relocating for work or school or those who have had a change in circumstances. It could hamper businesses needing larger premises due to continued growth. There is also the potential to further slow down the market.
The deadline for submissions is 18 October 2019. Ministers will make decisions on this issue in late 2019, after considering submissions received. Any changes are expected to be included in a Bill in early 2020.