Habitual Land Transactions Tax Proposal
Habitual buying and selling of land is now under the microscope, with tax officials consulting on proposals to strengthen the land tax rules, writes Mark Withers.
1 October 2020
Tax officials have been in a consultation process of late around proposals to strengthen the land tax rules that relate to the habitual buying and selling of land.
Readers could be forgiven for wondering how more change in this space could possibly be necessary given the introduction of the five-year bright-line that taxes gains on the sale of residential land not covered by the main home exemption, where sold within five years.
The tax department is concerned about the potential for abuse of the exemptions that relate to the current taxing provisions as they apply to a taxpayer’s residence or business premises. Existing rules ensure someone who is regularly buying and selling homes becomes taxable on these gains when they are undertaken frequently and where occupation of the property is secondary to a profit motive.
However, where individuals associated to one another undertake these same transactions the existing associated persons rules do not capture this repetitive activity. For example, a home could be occupied and sold by a husband and wife where the legal title is in the husband’s name, the next property could be in the wife’s name, and so tax is avoided despite a regular pattern emerging.
‘It is clear that the Government is determined to ensure any loophole that may exist is closed’
IRD are also worried that where the nature of the transaction differs, it can be argued that the transactions are not similar in nature and accordingly fall outside the interpretation of the regular pattern provisions. For example, home one might be a do-up and on-sell, home two might be a section purchase with a new build, thereby offering an argument that the pattern of activity differs such that tax might not apply.
Intention Test Applies
Submitters on proposals to strengthen these rules though have been concerned that changes could overreach and create situations where tax may be payable in circumstances where the exemptions for residences and business premises genuinely should apply.
The final recommendations that look to be adopted will include an “intention test” to the regular pattern exclusions so that residences or business premises will only be taxed under the regular pattern provisions if the land was acquired with an intention
Officials also remain of the view that the provisions should extend to include a person or a group of persons that undertake buying and selling activity together. Officials consider that the grouping provisions should apply when all owners occupy all of the properties as their residence, or if the people who occupy all of the properties as their residences control the trust or other entities that own the properties.
Whilst it seems that the loss of tax revenue from people gaining these exemptions for regular buying and selling is a trickle rather than a flood, it is clear that the Government is determined to ensure any loophole that may exist is closed.