It is proposed to make the profits on sales of residential property taxable if sold within two years of acquisition, subject to certain limited exceptions. There will be no “purpose” or “intention test” to determine whether profits are taxable, as is presently the case. This is not law yet but it seems very likely it will be soon.
The new law is intended to apply to residential property acquired on or after 1 October 2015. It will be the date of the agreement for sale and purchase that will determine if the property has been acquired on or after 1 October 2015 (unless for example the residential property is acquired by trust distribution, gift, in-specie company distribution). This might explain some of the recent activity in the residential space.
Residential property acquired after 1 October 2015 will be subject to the new law.
After 1 October, the acquisition date (to determine the two year period) will be the date that titles are registered in the new owners’ name. The disposal date will be the date of the agreement for sale and purchase for the sale of the land. This helps make the period as short as possible! So if you signed up to buy a residential investment property on 10 October 2015 but the settlement was 10 November 2015, then a contract for sale of the property entered into prior to 10 November 2017, even if conditional, is caught and any gain on sale could be taxable. The different timing rules have the potential to trip people up.
This is mostly a one-way street too. There will be no deductions allowed for interest for example. Losses on the sale of residential property will be ring-fenced also.
The exceptions include the sale and purchase of your “main” home. You can only have one main home. Other exceptions apply if residential property is inherited or acquired under a relationship property agreement. There are lots of other circumstances where a sale might be forced or motivated by reasons other than realising a profit but that won’t matter. The profit will still be taxable if e.g. a job loss forces you to sell or you need to relocate to a new city.
The new law will not apply to business land or to farmland. There is a question mark at the moment where bare residential land sits if there is no current plan to build on it. Serviced apartments might also be exempt. We are waiting to see what the new provisions look like.
The sale of shares in a company that owns the residential property will be caught. These are currently referred to as “land rich entities”. This part is not fully developed yet. At the heart of this will be anti-avoidance provisions designed to stop structuring solutions being used to defeat the new law. There will also be rules to deal with on-sales, novation and hopefully nominations.
The main home exemption will extend to trusts where the beneficiaries use the property as their main home. If the settlor already has a main home owned by the trust then the exemption will not apply. This could be problematic for trusts settled by third parties where the asset is the family home. Once this detail is clearer there will be issues for trusts to work through here.
More soon. The feedback to the issues paper released by the IRD is currently being considered. The new law is intended to be introduced in September this year.