Subdivision Tax Issues
If a property owner wants to subdivide a large block of land into five different sections and then sell the new sections, will there be major tax implications?
1 July 2019
We have 40 acres of bare land which we purchased in 2005. We were going to build on it but have now moved out of the district. We understand that if we sell it as one block there will be no tax implications. However, we have decided to subdivide the block into three 10-acre and two five-acre blocks. We will provide power to the sites, fencing and gravel driveways/entries.
We are not sure if this qualifies as minor or major work when it comes to subdivisions – but we are not property developers. We have struggled to find information about the tax implications of this in New Zealand.
Can you help with some answers before we go ahead with the subdivision? If we do have to pay tax on the profit minus the cost of the land – do you know what percentage it is?
Section CB 13 taxes gains from the disposal of land where that land has been the subject of a scheme of development or division that involves significant expenditure on earthworks, roading, drainage, etc. To be taxed under this section you must not be taxed under any of the other taxing provisions.
This is because tax calculated under this section is based on the gain relative to the market value of the land before the scheme of division, rather than the cost price of the land. So the capital gain you have enjoyed is not the focus of the taxing provision, rather the development profit from the subdivision is.
It’s wise to obtain a registered valuation before you begin to determine this new cost base for the tax calculation. The IRD has recently released a comprehensive guideline paper setting out what they consider to be “major expenditure”, and they look at this as quantum overall and the relative cost compared to the asset value. The paper contains useful examples that help to give a context to the matter.
However, the taxing provision applies regardless of whether or not you are property developers and regardless of how long you have owned the land.
Tax on these sorts of projects would normally incur the top marginal rate of 33%. But be careful also of GST: the activity of dividing a block of land into five lots will almost certainly amount to a taxable activity for GST and that has a further 15% output tax payable on disposal.
- Mark Withers
Deceased Bond Recovery
In my rental unit I had long-term tenants who were previously the owners. Unfortunately, both are now deceased. The issue I am facing is the recovery of the dues from the bond money. There was an outstanding balance of $650 to be recovered from the bond money.
We are unable to locate the legal heir to the deceased tenants as they had no children. We filed a case with the Tenancy Tribunal.
But it has refused to give a decision to release the bond money unless we locate next of kin or people who manage the estate.
We tried Public Trust and could not locate anything. Is there any way this issue could be resolved? I am sure this won’t be the first instance of this.
As the Tenancy Tribunal has determined that the representative of the deceased tenant must be located, then locating the next of kin or executor of the tenant’s will is indeed the best place to start. Given you have tried Public Trust, you could check with local law firms who may have had the deceased as a client. Or if someone has retrieved the tenant’s possessions, you could try contacting them. Once an executor or next of kin has been located the Tribunal can hear the application. If you are unsuccessful in locating either an executor or next of kin, I suggest returning to Public Trust for guidance.
- Jennifer Sykes
A relative is keen to downsize and get into investing. They will have around $700,000 in cash. What type of strategy, including location and type/number of properties would you recommend? Ideally, they would like an income to replace their current salary, which is around $70,000.
It would be best if a few other factors were known, in particular their age. If cashflow is a priority and capital growth prospects are to be disregarded, then apartments or getting into regional New Zealand could be good options. Generally, smaller towns will have higher returns but make sure you are working off net yield rather than gross. Also, bear in mind that going too small or into a region that has a decreasing population can be a nightmare as vacancy rates can be high and real returns can drop.
- Kris Pedersen
Off-The-Plan Interest Deduction
If I borrow to fund my deposit for an off-the-plan apartment, is the interest deductible now, even though no rental income will be derived until the building is completed in two years’ time?
You would think that a simple question like this would have a simple answer. However, that is not the case. If you borrow the money via a company that is not a Look Through Company (LTC), then there is a simple answer. The interest is deductible. “Ordinary” companies have automatic entitlement to claim interest regardless.
If you borrow the money personally or via an LTC, there are two schools of thought. The IRD’s view is most likely that the interest is not deductible because there is not a nexus with current income. The alternative view is that the interest is deductible because there is a nexus with expected income in the future via the eventual rent. It is worth noting that perhaps there may be other options within your structure that offer more assurance in terms of the deductibility of interest.
Also worth noting is the impact of the new ring-fencing rules which water down the benefit of claiming interest in relation to a residential rental property. I suggest you get advice as there may be a way to structure the borrowing so that not only is there not a dispute with the IRD over deductibility, but you maximise benefit from the deductions.
- Matthew Gilligan
Utility Cost Bundling
Who is responsible for bottled gas supply to a tenancy? I understand that we have to pay the bottle hire fee and that the tenant pays for the gas consumed. If the account is in my name and I on-charge the tenant for gas every month I can claim the hireage portion as an expense. The problem is that the tenants want to do a bundle discounted deal with power, phone, internet and bottled gas and then on-charge me the annual bottle hireage fee. Any advice?
Normally, a tenant is responsible for the cost of utilities. So the tenant pays for the gas usage. Generally, the owner is responsible for the regulators and piping costs. If you wish to make an arrangement with the tenants to bundle the gas, internet, power and phone facilities for an agreed cost, that should be fine as long as you both agree on the formula.
However, there may come a time when either you or the tenant thinks it’s not such a good idea. That’s when such bundling deals come unstuck. Be prepared to revise the formula if usage becomes one-sided.
- Bernard Parker
Non-Written Tenancy Agreement
We have had a tenant abscond without written notice. He didn’t have a written tenancy agreement as he would not provide written references or his driver’s licence for us to check and verify his identity. He did pay his rent most of the time since moving in last July. My question is - was he a tenant and did we have an agreement even though it was not a written one?
The Residential Tenancies Act still applies even if a tenancy agreement isn’t in writing. This means both landlord and tenant can’t avoid their obligations under the law. In this instance, should you wish to apply to the Tenancy Tribunal for rent arrears or other breaches of the Act, supporting documents – including correspondence with the tenant – would need to be provided for the application to be heard.
For future reference, it is recommended you do not accept a prospective tenant unless they comply with reasonable requests for information. The Tenancy Services website has a pre-tenancy application form (www.tenancy.govt.nz/ starting-a-tenancy/new-to-tenancy/pretenancy- applications/) which will help in the collection of that information.
- Jennifer Sykes
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