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Will the Commissioner be an unlikely beneficiary of the unitary plan?
Tax Alert - August 2016
With the release of Auckland’s proposed unitary plan (“the unitary plan”) on 27 July 2016, some Auckland land owners may be excited about the new potential earning possibilities from the sale or development of land which has been rezoned. But there is another person who could also benefit from the change in rules: The Commissioner of Inland Revenue.
The unitary plan suggests several significant changes which will enable land owners to develop their land in new ways. In light of the current state of the property market, there are likely to be some looking to sell rezoned land and make a significant profit. But those contemplating this should ensure they seek tax advice before doing so. While the commonly applied land rules may not require you to pay tax, the less-common section CB 14 of the Income Tax Act 2007 may apply to tax income derived.
Under section CB 14, a person who sells their land within ten years of buying it, and for more than it cost, will be required to pay tax if at least 20% of the gain can be traced to a factor under the Resource Management Act 1991 (“RMA”). The list of qualifying ‘factors’ is very broad. If 20% of the gain is due to the rules of an operative district plan under the RMA (e.g. the unitary plan) then the person selling the land must pay tax. Equally, if 20% of the gain is due to the likely imposition of rules, or a change to the rules, or even the “likelihood of a change to the rules,” the person selling the land will find themselves squarely within the rules. In other words, this rule already applies.
However before bemoaning the long arm of the law, this land tax rule will not apply where the seller initially bought the land for “residential purposes” and the sale was made to a person “who acquired it for residential purposes”. Those who currently reside in the property and sell to a person who either purchases the land to live in or to build a house to live in, will not be subject to tax, whereas if they sell the land to a developer they will be subject to tax. And tempting as it might be for people to structure around these rules, the Commissioner has wide powers to look at the circumstances of the disposal and other relevant matters to determine whether the person acquiring the land did so for “residential purposes”. Since the fate of the sellers tax position is in the hands of the buyer to a degree, the seller will want to ensure they do due diligence on the purchaser’s true intentions, and perhaps document the agreed intentions of the parties. Similarly, there is a farming exclusion from these rules for land which was acquired and used for farming purposes, is subsequently rezoned and disposed of to another person who will continue to use the land for farming or agriculture.
Sellers who are subject to section CB 14 will be relieved to know that in addition to the normal range of deductions available, Inland Revenue also allows an apportioned deduction under section DB 28. The apportioned deduction is a percentage of the disposal profit proportionate to how many years the land has been held. If the land is held for 9 years, 90% of the profit is allowed as a deduction. If the land is held for 5 years, 50% is allowed.
It is likely that Inland Revenue’s special property taskforce will be scrutinising Auckland land transactions in rezoned areas in light of the proposed changes to the unitary plan.
The Council have until 19 August 2016 to finalise the unitary plan. For further information about these rules in relation to property you own please contact your usual Deloitte tax advisor.
Tax Alert August 2016 Contents:
- Supreme Court delivers Trustpower decision
- Undeveloped software taxation
- Safe Harbours for Trans-Tasman related party loans
- Employee share schemes? New PAYE rules will impact you
- Making tax simpler… for some
- Inland Revenue targeting language schools on GST issue
- Will the Commissioner be an unlikely beneficiary of the unitary plan?
- A snapshot of recent developments