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A Taxing Question Around ‘Build To Rent’

A Taxing Question Around ‘Build To Rent’

Mark Withers casts some light on when and if the properties are sold.

By: Mark Withers

1 July 2024

The latest buzzwords “build to rent” are used to describe large-scale residential developments owned and funded by institutional investors who offer long-term leases and secure tenancies to occupiers who in turn benefit from more certain tenures.

But building to rent, in the traditional sense, is nothing new.

Changes to planning rules that encourage higher-density housing has offered traditional investors the opportunity to redevelop property to build new dwellings that are intended to be retained as rentals, rather than sold for a developer’s profit.

So, while the investor is undertaking a development, they are doing it with an intention to retain for rental rather than an intention to dispose of the development on completion. The properties developed are accounted for as capital account assets of their investment activity rather than revenue account stock of a development activity.

What, then, is the tax position in this situation when and if the properties are sold?

The 10-Year Test

The starting point for this is section CB12 which taxes an amount derived on disposal of land that has been subject to an undertaking or scheme involving the development or division into lots of land where the work involved is more than minor and the person started the scheme within 10 years of acquiring the land.

The interesting thing about CB12 is that the section focuses on whether the work was undertaken within 10 years of acquisition rather than how long the properties are retained beyond completion.

This begs the question, will gains on disposal of properties developed to rent be taxed, just because the projects were started within 10 years of acquisition, where there was no plan to dispose of the completed properties?

The answer is found in section CB23, which is one of several exclusions to the taxing provision in CB12.

The exclusion in CB23 is known as the investment exclusion. It applies to exclude the application of CB12 if the work involved in the undertaking or scheme is to create or effect the development, division or improvement, and the development, division or improvement is for the use in, and for the purpose of, deriving rental income and other forms of investment income.

A question often put is “how long will I need to hold the property as a rental investment to be able to apply the exemption?”

Walking The Talk

It is arguable that if the purpose to derive rent existed, but circumstances changed resulting in sale, the exclusion could still apply, although the onus is on the taxpayer to prove their original purpose was to derive rent from the land.

As such, no specific tenure of ownership is required to allow the exemption to be applied, but strong evidence of purpose would be needed to convince the tax department that the purpose of development was to derive rent, if in fact the property was sold on completion.

Walking the talk and deriving rental income from the property will be the soundest basis from which to draw comfort that the exemption in CB23 will allow disposal gains to remain untaxed.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. PKF Withers Tsang & Co Phone 09 376 8860, www.pfkwt.co.nz