Head of the Martz Group.
There’s no such thing as capital gains tax in New Zealand… is there?
Although there is no specific capital gains tax, there are some occasions where profits on land sales are taxable, and that could include sales of the family home.
Changes to the way that land sales are processed means that it is even easier for the Inland Revenue Department to match transactions with property developers or speculators. There is even a special IRD form (IR833) for taxpayers to record land sales which the IRD are sending out where they believe income should be returned.
Most people will be aware of the new Bright-line Test which taxes the sale of residential property if sold within two years of acquisition, but there are a lot of other times that the IRD will seek to tax you on any property sale gains.
We have come across a number of situations recently which may catch out a lot of property developers or dealers.
Consider the following scenario.
Tom’s Building Company Limited built four townhouses for sale. The company is in the business of building houses for sale and as such, he is aware that the sale of the properties is taxable. Tom’s wife really likes the townhouses and they decide to purchase one to use as their family home. Ten years later Tom’s wife is struggling with the stairs in the townhouse, so they sell the townhouse and move to a small retirement unit.
What they may not have realised is that any profit Tom and his wife make on the sale of the townhouse will be taxable income and they can’t rely on the family home exemption or the Bright-line Test exemption.
Why? Because they bought the property from an associated entity (the building company) and the sale, if the building company had retained it for that entire period, would have been taxable.
We have also seen a case where a couple has purchased a family home in their own names. Within two years they decide that the property should have been purchased in their family trust, so they arrange for the property to be sold and their trust to acquire it.
What they didn’t realise was that as this sale was completed within the two-year period of initial ownership, the gain in value of the property was taxable under the new Bright-line rules. This could have been avoided if they had waited a few more months.
Any transaction involving land is usually a high dollar value transaction. As such, the tax consequences of getting it wrong can be costly. We understand that the IRD are currently reviewing some of these rules. Let’s hope common sense prevails.