Four ways you could be taxed for capital gains on land
5 March 2021
New Zealand has a comprehensive set of rules which specifically taxes land but all too often we work with people who are surprised their capital gain could be at risk of tax.
While a comprehensive capital gains tax is currently off the table, it does not mean that a perceived capital gain is free from tax. So how could you be subject to tax on your capital gain?
1. Bright-line Rule
This is the most recent tool in the land tax toolbox and is largely responsible for bringing the taxation of land into mainstream transactions.
The rule is a relatively blunt instrument because it takes intent out of the equation and simply taxes the sale of residential land if sold within five years of purchase unless an exemption applies, such as being predominantly used as the main home of the owner.
However, while a comparatively simple rule to assess, it often inadvertently catches people out because they simply get their timing wrong or their situation changes.
This test has become incredibly prominent and easy way for the Inland Revenue Department (IRD) to investigate given they have the sales data and the ability to match IRD numbers to transactions.
2. One-Off Subdivisions
Often, people assume they won’t be subject to tax if they carve off a piece of their property and sell it because they are not are a developer.
Unfortunately, there are rules that can tax even small-scale subdivisions. This is especially problematic if undertaken within ten years, because the threshold for the subdivision to be taxable is not that high.
Such subdivisions are increasing in prominence as councils free up land so that more houses can be built.
3. Land Use Changes
Even if a subdivision is not undertaken, you could be taxed if there is a change made to the use of your land. For instance, if you are able to divide your land through a district plan change, or a resource consent is granted allowing a subdivision thereby increasing the land value, there is a specific tax provision that can apply to make the sale taxable, even if you have not undertaken any subdivision or development.
4. The Ten Year Rule
One of the common beliefs we hear from clients is they can’t be taxed if the land has been owned for more than ten years. While true in some cases, there still a few rules that can apply beyond ten years. For instance, if a person does a one-off subdivision of a certain scale it is possible for that to be subject to tax beyond ten years.
It is increasingly important to get the right advice to help avoid re-investing your capital gain and then finding out you have a tax bill. The rules are unfortunately not always clear and often there is a pragmatic way forward.
It is also important to re-iterate that non-detection is not a smart strategy. The IRD have greater data analytic tools to investigate property transactions and have become more to be more active in this regard. It is far better to understand your options so that you can make the right choice.
Watch our capital gains tax on property webinar recording
While the government has ruled out introducing a “Capital Gains Tax” in New Zealand it is still common for every day “capital gains” to be subject to tax (Capital Gains Tax by stealth you might say).