While New Zealand does not have a comprehensive capital gains tax system, we do have wide ranging rules that will tax land sales. When could your land sale be taxable?
The Bright-line test (for land disposals from 1 July 2024)
This is as close to a capital gains tax as you’ll get. It’s largely an objective test, until you get into the nitty gritty of the “main home” and “farmland” carve-outs. While it’s the test that is most often talked about, it sits behind all the others (that is, it’s only relevant if none of the other land taxing provisions, per below, would first apply).The Bright-line test will tax sales of residential property (and excludes farmland and land used for business premises) if sold within two years of when you bought it.
Clearly, date of purchase and sale are important. There are exceptions, but generally the 'purchase date' is registration of title and 'sale' is the date the person enters into an agreement to sell the property (such as a conditional sale and purchase agreement).
The concept of your “home is your castle” stands and your main home is not subject to the rules.
We have compiled below a list of common questions we’ve seen on the application of the Bright-line rules:
How does the main home exclusion work for property owned in trust?
If a beneficiary occupies a trust property as their main home, then the exemption will apply if a principal settlor of the trust does not have a main home, or it is the main home of the principal settlor. A principal settlor is the person who has given, financially, the most to the trust.
I’ve got two main homes. Can I use the exemption for both?
No. For the purposes of this rule, the main home is the one you have the greatest connection with. In confirming this, you should be thinking about:
- Where you spend most of your time;
- Where your immediate family live;
- Where your social, business and economic ties are strongest;
- Use of the home;
- Where you keep your personal property.
Can I use the main home exclusion over and over again? I have moved four times within the last two years.
Unfortunately, you can’t use the main home exclusion over and over again. The rules state that the main home exclusion is not available to a person who has used it twice or more in the two years immediately prior to the current sale. The exclusion is also not available if a person has engaged in a regular pattern of purchasing and selling the main home.
I’ve inherited the family bach that’s been in the family since I was little. I’ve never liked it and want to sell it. Do I have to pay tax under Bright-Line?
No. The Bright-line test does not apply to inherited land.
I haven’t always lived in the property as my main home. I used it as a rental when I was overseas.
The land must be used as a main home for most of the bright-line period (more than 50%). You aren’t required to have occupied as a main home for the whole of the two years. More information is needed, but renting for short periods of time does not necessarily mean the main home exclusion is not met.
I own land personally and want to transfer it to a trust. The transfer is within the two year bright-line period, will bright-line apply?
Rollover relief has been introduced to defer the bright-line provision for certain related party transfers. If qualifying criteria are met the trust steps into the shoes of the individual for tax. This is providing the transfer is undertaken at original cost.
Intention or purpose of resale
The forerunner of the “Bright-line” test, is land that was purchased with the intention or purpose of sale is taxable on sale. This provision is also aimed at the property speculator, except is harder to prove due to its subjectivity of application (hence the perceived need for the “Bright-line”). This test examines the mind of the taxpayer at the time of the purchase and seeks to tax those that have a pre-determined plan of sale; it does not seek to penalise those who purchase land with the mere hope it will prove to be a good investment on a future sale.It's important to note that actions and words to others can speak louder than words to Inland Revenue. Just asserting that you did not acquire something for sale is not necessarily sufficient. In building a position, in our experience, Inland Revenue will certainly go further than your words to them and will focus on the circumstantial information available at the time of the purchase, your actions and what you said to others.
For example: What information does the bank or lawyer hold? Is finance on the property short or long-term? How long was the property held for (five years and one day)? What were the reasons for the sale (is there a valid change in circumstances)? How did the sale come about (was the land owner approached with an offer they could not refuse, or did the land owner initiate the sale?
There are various exclusions for an individual’s home and/or for property that is used for business premises. Caution must be taken when applying these exclusions. For example, if you establish a regular pattern of buying and selling your personal home, then the exclusion cannot apply.
Business relating to land
Land acquired for business relating to land is subject to taxation on sale. Businesses include dealers, developers, subdividers and builders, i.e. you buy land to sell, or to develop and sell or to subdivide and sell, or to build on and sell.The rules contemplate that a person may both be in a business relating to land, but also wish to hold land as a long-term investment. However, the long-term investment land must be held for at least 10 years (with modification for builders – discussed further in the next section) for it not to be taxed. The presumption is that land held for less than 10 years was purchased for the business purpose.
Persons associated or closely connected
Did you know that the actions of another can impact the taxation of your land holdings, if that other person is closely connected (or “associated” to use correct terminology) to you? These rules provide that a sale land is taxable if:
- At the time you purchased the land you were associated with a person in a business relating to land; and
- The land was sold within 10 years of acquisition.
- Improvements were completed on the land; and
- At the time the improvements commenced you were associated with a person in the business of building on land; and
- The land was sold within 10 years of completing the improvements.
Exclusions can again apply to personal residential land and land used as business premises.
Subdivisions/development starting within 10 years of acquisition
This rule can be highly subjective in application.Under this rule, sales of land are taxable if:
- The land was subject to a subdivision or development scheme; and
- The scheme started within 10 years of acquisition; and
- Work involved was more than minor in nature.
Common issues include:
When does a scheme to subdivide commence?
Commencement will depend on the facts of the case, but broadly refers to the first positive or overt act to implement the scheme. It does not necessarily refer to a physical step (such as the first hole in the ground) and could be the drawing up of detailed plans.
I started a subdivision, but did not finish; is the land still taxable?
It is possible to abandon a scheme, the taxation impact will be fact specific.
I subdivided land from one into four sections. I’m going to keep two and sell two. I’m happy to pay tax on the two for sale, but it doesn’t seem quite right that I’d have to pay tax on the remainder.
A good point. Inland Revenue has confirmed that residual land (being land that is the product of a subdivision and not for sale) would not be subject to taxation. Of course, if you sold within a relative short-time period of completion, it would raise doubt as to your stated motive (of retention). Documentation of intention at the outset is important here.Exclusions will again apply for residual land that is not subdivided for sale or for farmland (subject to specific criteria).
The “Rezoning” provision
For this provision to apply the landowner does not necessarily need to action or implement anything; it is what the law does, or may do, to the land.Sale of land are taxable under this provision if:
- The land was subject to a change, or likely change under the Resource Management Act 1991; and
- At least 20% of any increase in value of the land can be attributed to the change or likely change; and
- The land was sold within 10 years of acquisition.
Exclusions may apply - again, think residential land and farmland.
Major subdivisions/developments
This provision is focussed on catching the big subdivisions and developments that don’t get caught elsewhere and will tax sales of land:
- Subject to a subdivision or development scheme;
- Incurring significant expenditure on major land projects.
There is a vast amount of information on what constitutes “significant expenditure” and further Inland Revenue concedes that “context” is relevant in determining whether or not this provision would apply. As an extreme example, a simple subdivision commenced after 10 years of ownership of one into two would likely not, in the context of this provision, be subject to taxation. However, a subdivision of one into 20 is quite different (in terms of context).
This provision provides full relief for prior gains in value. Ordinarily, taxable income is calculated by simply taking consideration on sale and deducting historical cost. However, for this provision, concessionary treatment changes “cost” to be the market value of the land at the time the scheme commenced (so you would be advised to obtain a formal valuation if this provision applies to what you are doing). This acknowledges that land could be held for many, many years prior to a scheme commencing. For obvious reasons this provision will only apply if none of the other provisions could apply in the first instance.
Exclusions are again available for subdivided/developed land to be held for the long-term and specific farmland.
If you’d like any assistance meeting your tax obligations, reach out to your BDO adviser or find out more about our tax services here.