Building Improvements Tax
Carole Pedder discusses whether the fit out of an existing building is considered an ‘improvement’ for tax purposes.
1 April 2018
It is quite common for more experienced property investors to try their hands at either property development or trading at some point. If they are successful, it is also not uncommon for investors to continue wearing the two hats and have both an investment portfolio and also carry on developing, trading or erecting buildings for profit.
Earlier this year the Commissioner responded to a question regarding the application of section CB 11.
CB 11 applies to a person who is in the business of erecting buildings, or a person who is associated to a person who is in the business of erecting buildings.
The question raised was “could the fit out of an existing building be ‘improvements’ for the purpose of CB 11?” If applicable, then the outcome for the taxpayer is that the net proceeds from the sale of the building, within 10 years, may be subject to income tax.
The short answer to this question is yes but, once again, the tax payer is required to apply the law correctly. Just like the rules determining the deductibility of repairs and maintenance, there is a lot to consider before taking a tax position in your tax return.
How Does CB 11 Apply
For CB11 to apply, the fit out undertaken would need to meet the definition of “improvements” contained within section YA 1.
‘Buildings are legally considered to be attached to or part of the land, so work carried out on a building can result in an improvement’
For the purpose of CB 11, improvements are defined as an improvement made to land that is not minor, and made by a person in the business of erecting buildings. Or by a person who is associated to a person in the business of erecting buildings.
Taking the first two parts of the definition of improvement in turn, the first step the taxpayer needs to consider is if the fit out undertaken is in fact an “improvement to the land”.
The initial thoughts of a taxpayer may be that a fit out cost does not improve the land, but instead improves the building. However, this line of thought would be incorrect.
Case law has found that an improvement to land is: any work done to land that enhances the value of the land. Buildings are legally considered to be attached to, or part of, the land so work carried out on a building can result in an improvement to the land. Fit outs included.
In most circumstances it would be safe to assume that any parts of a fit out that are permanently attached to the building will become part of the land.
The second aspect that a taxpayer must determine is if the work is “not minor”. If the fit out undertaken is considered to be minor, then CB 11 will not apply.
Once again there has been considerable debate as to what defines a work as “not minor”. This is a subjective process and best done with the assistance of your tax adviser.
If you are still feeling unsure, or if you have any issues in regards to the CB11, please feel free to contact Carole Pedder at Withers Tsang for a confidential chat. All of the relevant contact details are listed below.
Carole and her team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz