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FIVE THINGS YOU NEED TO KNOW ABOUT CAPITAL GAINS TAX

The Inland Revenue is clamping down on property speculators and land traders.

Although, it is widely said that New Zealand does not have a capital gains tax, in certain circumstances capital gains on land transactions are in fact taxable.  

There are five main categories of taxable land transactions. We've summarised the key things you need to know to take away the guesswork.

Property purchased with the intention of re-sale

If a taxpayer buys land with the purpose or intention of disposing of the land, the taxpayer will be liable to pay tax on the increase in value of the property at the time of sale.

The taxpayer's purpose or intention must have "crystallised" at the time the property was purchased. If a taxpayer acquires property with a vague hope that the property will be a good investment, the gain in value of the property will not be taxable. 

A typical example in this category is a property speculator.  

Purchaser or associated person is a land dealer, developer or builder

If a taxpayer or an associated person carries on a business of dealing in land, developing land or erecting buildings and either:

  • Acquires a property for the purpose of their business; or 
  • Disposes of the property within 10 years,

then they will be liable to pay tax on the increase in value of the property at the time of sale.

An associated person includes a relative, a trustee of a relative, a settlor and a beneficiary, and two related companies. 

A typical example in this category is a land dealer, land developer or builder selling a holiday home within 10 years of purchase.

Subdividing land within 10 years

If a taxpayer undertakes a development or subdivision, that is not of a minor nature, within 10 years of buying a property, the amounts derived from the sale may be taxable.

Whether work is of a minor nature depends on all the circumstances of each case, having regard to the time, effort, difficulty and expense involved.

Major subdivision involving significant expenditure

If a taxpayer subdivides a property and incurs significant expenditure in doing so (for example, drainage, power and roading), the amount derived from the sale of the properties may be taxable.

Increase in value due to rezoning

Where at least 20 per cent of the gain in value of a property is due to a change in zoning, resource consent or similar factors, the increase in value of the property is taxable. The sale must occur within 10 years of purchase. Further, in some circumstances, a deduction is allowed depending on the number of years the property was held.

A typical example is where a taxpayer receives a windfall because of re-zoning into a popular school zone.

Exemptions

There are exemptions for tax liability under each category. The major exemptions are where the property is the taxpayer's own private residence, business premises or a farm.

Careful consideration needs to be given to what actions or intentions can trigger the commencement of a taxable 'scheme', not just to determine whether a scheme is taxable or not, but to calculate any potential profit on sale.

The above is a broad summary only, is not legal advice and should not be acted or relied upon without seeking legal advice.

 

 

Written by Harriet Enright at 13:00

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