Land sales changes – are you in a regular pattern?
Tax Alert - July 2020
By Hiran Patel and Blake Hawes
In response to the regular cries that ‘property speculators don’t pay any tax’, and with the abandonment of any capital gains tax, when the Government’s tax policy work programme was announced in 2019, one of the high priority workstreams included was a review of the land sale rules. In particular, the work programme included an item to improve the integrity of the rules for “habitual renovators”. What followed in September 2019 was a consultation document entitled “Habitual buying and selling of land” (refer to our October 2019 Tax Alert article here). Following consultation, legislative amendments to address the issue of habitual renovators was included within the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (“the June Bill”) tabled in parliament on 4 June.
What is the issue?
Broadly speaking, where a taxpayer buys and sells land, and the proceeds from that transaction are subject to income tax, there may be an exclusion from the proceeds being taxable if the land or property is their “main home” or “business premises”. However, this exclusion won’t apply when a taxpayer engages in a “regular pattern” of acquiring and disposing of main homes or business premises (this is referred to as the “regular pattern restriction”).
The perceived issue with the regular pattern restriction is that it generally only applies to a single taxpayer. Therefore, a group of related taxpayers could potentially alternate the ownership of successive pieces of land and no one individual taxpayer could be said to have a “regular pattern” of acquiring and disposing land of that type (as each taxpayer within the group wouldn’t have created a pattern, even though there might be one when you look at the substance of what is occurring).
What is the Government doing to fix this?
To stop any mischief from groups of taxpayers structuring their ownership to circumvent the regular pattern restriction, the legislative reform included in the June Bill will mean that the actions of a group acting together will also be considered when assessing the “regular pattern” of a taxpayer.
For example, if person A and person B live together and person A buys and then subsequently sells four houses all within four years, person A will likely have a regular pattern of acquiring and disposing main homes, and the main home exemption would not apply. However, if person A bought the first house, person B bought the second house, person A’s trust bought the third house and person B’s trust bought the fourth house, a “regular pattern” would not exist because all four taxpayers have only acquired and disposed of one property each. Under the new rules, as person A and Person B (as individuals and in their capacity as trustee of their trusts) are a group of persons who have occupied all four properties, then the sale of all four properties will be considered when determining whether a “regular pattern” exists. In this case, it is very likely that the main home exemption will not be available.
If I’m part of a small business regularly upgrading premises or part of a large family purchasing and selling land should I be worried?
In short, no. The changes to the legislation may look worrying due to the grouping of transactions by multiple taxpayers, however the new rules include a secondary amendment that will only deem the proceeds from the disposal of land as taxable where a “regular pattern” exists and the land was acquired with the purpose or intention of disposal.
For example, if StartUp Company Ltd was growing much faster than expected, and in the last six years acquired, moved into and then sold five different business premises because they were growing so fast and constantly needed more room, a regular pattern of acquiring and disposing business premises may arise and the disposal of each premises may be subject to income tax. The requirement to have a purpose or intention of disposal will ensure that StartUp Company Ltd will only be subject to income tax on the disposal of business premises when this purpose or intention exists. Therefore, as the growth of StartUp Company Ltd was so rapid, and each new premises was acquired only for the intention to continue to operate their business from, the proceeds derived from the disposal of any business premises of StartUp Company Limited should not be taxable when relying on the business premises exemption.
When does this apply from?
The updated regular pattern restriction will only apply to land acquired after the enactment of the bill (which is likely to be early 2021) however land purchased before the enactment date will still be eligible to be considered as part of any “regular pattern” of a taxpayer, or group of taxpayers acting together.
If you would like to discuss the implications of these changes and how they might impact you, please contact your usual Deloitte advisor.
July 2020 Tax Alert contents
- Land sales changes – are you in a regular pattern?