Many local and regional authorities are currently going through the process of reviewing and revising their District Plans. The changes to the District Plans and flow-on effects on land zoning and land usage rules can alter the value of the land affected by those changes. Moves towards ‘intensification’ can mean that a property that previously could only accommodate a single dwelling may now be able to be occupied by several or a multi-storey apartment block. This obviously greatly enhances the value of that land and may encourage the owner to develop the land further or to sell it to access the enhanced value.

While New Zealand has no general capital gains tax, there are a number of taxation provisions that can convert a capital gain on the sale of land into a revenue receipt. One that has had a lot of publicity lately is the new bright-line (two year rule) that applies to residential land. Others take precedence over the bright-line test, for example that land is acquired to sell, where a development or subdivision is undertaken, or where the landowner is associated to a land dealer or developer. There is also lesser known land taxation provisions that can tax the proceeds of selling land for no other reason than the value of the land has increased due to a change in its zoning, a district plan or granting of resource consent.

This taxation provision applies where land is sold within 10 years of acquiring it, the value of the land has increased due to a zoning change, resource consent or change in a District Plan (or the possibility of one of these things occurring) and 20% of the profit on sale is due to that change or possibility of change. There is no need for the landowner to have initiated that change, it is sufficient for the change to have occurred and contributed to the profit on sale.

There are exclusions from this rule that apply for residential land and farmland. However, these only apply where the taxpayer has used the land as their home or for a farming business and are selling to a person for use as their home or a farming business. The residential exclusion will not apply when the residential property is owned by a family trust.

This provision has not been applied greatly in the past, but with the current round of District Plan reviews, it may be one that Inland Revenue turns to more in the future. If you are selling a property you have owned for around 10 years or less that has had its zoning or use affected by a change in a District Plan, it is important to speak to a specialist tax adviser to understand the potential tax liabilities.