Land with a purpose or intention of disposal

Land acquired for a purpose or with an intention of disposal

On 25 February 2016, Inland Revenue released draft Question We’ve Been Asked PUB00260: “Income tax — land acquired for a purpose or with an intention of disposal” for consultation.

The item is about s CB 6 of the Income Tax Act 2007 (acquisition of land with a purpose or intention of disposal) and discusses when s CB 6 will apply.  The item considers that if land is bought for a purpose or with an intention of selling it, the proceeds of the eventual sale, whenever that occurs, will be income under s CB 6 unless one of two exclusions apply. The exclusions are as follows:

Exclusion 1 — residential land (s CB 6): If the land has a house on it, or you build one, and you occupy the house mainly as a residence, you will not be taxed on the proceeds from selling the property. This also applies if you are a trustee of a trust, and a beneficiary of the trust occupies the house mainly as a residence. Note: This exclusion does not apply if you have a regular pattern of acquiring and disposing of houses, or building and disposing of houses.

Exclusion 2 – business premises (s CB 19): If the land is the premises of a business, and you acquired and occupied the premises or built and occupied the premises mainly to carry on a substantial business from them, you will not be taxed on the proceeds from selling the property. Note: This exclusion cannot be used if you have a regular pattern of acquiring and disposing of, or building and disposing of, premises for businesses.

The item also confirms that the two-year “bright-line” rule is in addition to the other land sale rules that have been in New Zealand’s tax law for many years.  The 2-year rule is aimed at being easy to enforce, by removing the need to determine what a person’s purpose or intention was if they sell residential land within two years of acquiring it.  But if the 2-year rule does not apply, the proceeds from selling land can still be taxed under one of the other land sale rules, including the purpose or intention rule.

Rental property not permanent place of abode

The Court of Appeal has dismissed the Commissioner’s appeal from the High Court’s decision reported asDiamond v C of IR (2014) 26 NZTC. The Court of Appeal rejected the Commissioner’s argument that having a rental property “available” to the taxpayer was sufficient to amount to having a permanent place of abode in New Zealand.  The Court of Appeal noted that the focus was on whether the taxpayer, not members of the taxpayer’s family, had a permanent place of abode in New Zealand. The Court said that the fact that a taxpayer may provide a home for his or her family in circumstances where the taxpayer lives elsewhere would not necessarily be sufficient to establish that the taxpayer had a permanent place of abode in New Zealand.

This judgement will obviously help to reduce the uncertainly when considering whether a person is a New Zealand tax resident.