Habitual buying and selling of land – what is a regular pattern?
Tax Alert - October 2019
By Jamie Abela and Amy O’Brien
The Government’s tax policy work programme has identified a need to review the current land sales rules, in particular in relation to investment property and speculators, land banking, and vacant land. As part of this review, officials have identified an issue with the current rules as they apply to people who regularly buy and sell land that they use as their home or as business premises.
The land sales rules contain exclusions for taxpayers who use their land as their main home, residence or business premises. However, these exclusions are not supposed to apply where the taxpayer has a “regular pattern” of buying and selling land used for these purposes. This is because it is assumed that a person who has a regular pattern of buying and selling land primarily acquires that land for sale and should be taxed on any gain, whether or not they used the land as their residence or business premises while they owned it. There are concerns that the current regular pattern restrictions are not working as intended.
Inland Revenue have issued a consultation document proposing some (fairly sensible) changes to ensure the “regular pattern” rules actually work. These are summarised below.
Group of persons or entities
As currently drafted, all of the regular pattern restrictions apply quite narrowly to the activities of a single person. This has enabled taxpayers to circumvent the restrictions by using different associated persons or entities to buy and sell land each time. For example, Person A would purchase a property, use it as their family home and then sell it. Person A’s partner, Person B, would then purchase a second property, which is again used as the family home. When that property is sold, Person A and Person B’s family trust would purchase a third property which is used as the next family home. This situation would not, in theory, be caught by the current regular pattern restrictions because a person has not engaged in a regular pattern of buying and selling land which was used as a residence or main home of that person.
Officials have therefore proposed an amendment to ensure that the regular pattern restrictions apply where a person, or group of people or entities, has a regular pattern of buying and selling land that has been:
- occupied by the person or group of people as their main home, residence or business premises (as applicable); or
- occupied as a main home, residence or business premises (as applicable) by the person or group of people that controls the entity or entities that own the land.
Officials note that a group of persons or entities will not have a regular pattern of buying and selling land merely because they are associated and buy and sell a number of properties. It will be necessary that the same person or group of people or entities all occupy each of the properties.
Because of the language used in the residential and business premises exclusions, the regular pattern restrictions in those provisions have been narrowly interpreted to apply only where there is a similarity or likeness between the transactions. This means that the regular pattern restrictions will not apply where a person has a pattern of buying and selling land that they occupy as a residence or business premises, where they carry out different activities on the land while they hold it. For example, the first property is bought, lived in then sold, the second is renovated while it is lived in and sold, or the third is a bare section where a house is built, occupied and then sold.
Official have therefore proposed that the restrictions should apply more broadly to any pattern of buying and selling the land used as a residence or business premises. The main consideration should be whether there are “regular” transactions, meaning transactions that occur at sufficiently uniform or consistent intervals. The nature of any activities carried out on the land, such as whether the properties were simply bought and sold or whether any building or renovation work occurred, should not be relevant.
Currently, the main home exclusion cannot be relied on to prevent income tax applying to land sales where it has already been used twice within the two years prior to the current sale.
Officials have suggested extending this time period restriction to the residential and business premises exclusions. In particular officials are suggesting that a time-period restriction of more than twice in three years might be appropriate.
While officials consider that the regular pattern restrictions require amendment to ensure that taxpayers cannot structure around them, it is not intended that such amendments should result in ordinary commercial or family transactions, where there is no purpose of sale, being taxed. They are looking for comments on whether such transactions are likely to be caught by the proposed amendments.
Submissions on the proposals are due by 18 October 2019. It is expected that decisions on this issue will be made in late 2019, with any changes to legislation expected in a Bill in early 2020.
If you would like to discuss the implications of these proposed changes, or you are interested in writing or contributing to a submission on the policy document, please contact your usual Deloitte ad
October 2019 Tax Alert contents
· Habitual buying and selling of land – what is a regular pattern?