Tax on property transactions not straightforward

As record property prices are recorded in some places (e.g. state houses selling for $2 million in Auckland), it is perhaps timely to remember that while NZ does not have a formal capital gains tax, profits on land can easily fall into the taxing net.

This may seem counterintuitive, but is a reality for many.

In general terms, if land (with or without a building) is bought with an intention of resale, or as part of a wider pattern of buying/selling buildings (i.e. a business), then the sale proceeds are likely to be taxable, with a deduction for the cost of the property. This can also generate a tax loss.

The taxpayer's intention at date of acquisition is critical to this outcome, so subsequent changes of mind or circumstances should be irrelevant to the taxing outcome.

I say ''should'' because sometimes actions speak louder than undocumented intentions. For example, imagine you buy a house to rent out but because you lose your job, you sell it within six months for a gain.

Arguably, the short ownership period should not be determinative of the profit being taxed, but without evidence of the intention to hold for the long term, the IRD may challenge the non-taxable nature of this transaction. Clearly, documenting your intentions in this type of scenario is critical.

However, the flip side also applies - if you buy it for resale but then change your mind and hold on to it for longer (e.g. to rent it out), technically, it will always be a revenue/taxable asset.

Other circumstances that can turn what would ordinarily be a non-taxable capital gain into a taxable gain can include being associated with a builder, developer or dealer in land at the time that the property in question is acquired (or, possibly, improved).

Given how wide the ''associated persons'' rules are, the offending entity/person may not be obvious to you. Of course, if the property owner himself is a dealer in land, builder or developer, similar taxing outcomes will probably arise.

Now to debunk some urban myths: simply living in a house you have built does not necessarily mean that it falls outside the tax net, nor is there a ''rule'' that says two or three property transactions a year are OK (i.e. not taxed).

It would be remiss not to note that there are some exemptions to these rules, but these exemptions are complicated and limited in their application. Accordingly, it is generally worthwhile to have a chat to your tax adviser if there is the remotest chance that one of the taxing provisions may apply to land you are looking to either buy or sell, as sometimes ''pre-emptive action'' may secure a better overall outcome.

On top of the income tax issues, GST can complicate things. However, in most circumstances, land sales between two GST-registered entities are zero rated. Flags for possible issues include new purchasing entities (are they GST registered?), people acquiring land for private or mixed purposes, and non-registered vendors.

In summary, for most of us, property transactions tend to be material in the context of our net wealth position, so ensuring the best tax outcomes can make a big difference. However, there is often little point in shutting the stable door after the horse has bolted, so early advice is best.

- Scott Mason is the Managing Principal for Taxation Consulting at WHK.