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The Question Of Intention And The IRD

The Question Of Intention And The IRD

It may be difficult to assess intention to sell, but the bright-line rules mean its rarely an issue these days.

By: Matthew Gilligan

31 August 2022

Q I get that the test for whether I have to pay capital gains on my property is based on “intention”. But, how does the IRD prove what my intention is when I buy a property?

A That is a very good question and in fact one of the reasons we now have the “bright-line” rule. You are referring to the intention rule. Under this rule, profit realised on selling a property is taxable if your intention at the time you entered into the sale and purchase agreement was to sell it. As intention is a subjective matter, it is difficult for the IRD to prove your intention was to sell it if you maintain it was not. The IRD can look at objective facts, like how long you held the property for, what loan arrangements you entered into, and what was your reason for selling. However, the intention provision is very rarely the focus of tax inquiry these days because of the existence of the bright-line rule. If a property is bought and sold within the applicable bright-line period (five years for property bought prior to March 27, 2021 and 10 years for property bought on or after that date), then intention is irrelevant. Profit realised on sale is taxable unless an exemption like the main home applies. So while you have a point that it is difficult for the IRD to assess intention, the fact of the matter is that the existence of the bright-line rule means that they very rarely have to do that anymore. – Matthew Gilligan

Q Some of the banks have lowered their interest rates recently, does that mean interest rates have peaked and are coming down?

A It is hard to say. On one side we have some economists who believe that the OCR will still need to be lifted all the way to 4 per cent (it is currently 2.5 per cent) to
control inflation and if it gets that high there will likely be more in the way of interest rate increases, although this is likely to mainly be reflected in floating rate increases which tend to be more or less indexed to the OCR. On the other hand we are starting to get some data such as oil prices at the time of writing dropping almost 30 per cent from a high in June to roughly the same as before the Russia/Ukraine war started in February.

This will reduce inflationary pressure and may play a part in the Reserve Bank not having to go as high as expected. The banks have also had their wholesale borrowing costs dropping with these having decreased by close to 1 per cent since June, which is why you have seen some recent decreases in fixed rates from the banks. I am wary to say they have peaked, but at this stage it is looking like we are not far off. – Kris Pedersen

Q I live in a five-bedroom flat with four other tenants. We signed a year-long lease at the beginning of the year, but I have now been offered a job in another city.
The landlord has said that I must find someone to take over my place in the flat. Is this correct? Shouldn’t I be allowed to leave?

A There are several ways to approach the situation you are in and believe it or not this is quite a common situation. Firstly, you can ask your flatmates if they agree to
you being removed from the lease. If they agree to this, they will have to make up the extra rent that you would have normally paid. You are going to need some pretty understanding flatmates for them to agree to this. Alternatively, you can just continue to pay your share of the rent; probably not a very viable option either because I assume you will have accommodation costs at the new city you are moving to. So, the best option for you is to try to find someone to take your place in the tenancy.

There are several websites you can advertise on and it’s quite surprising how often there happens to be someone “out there” looking for a tenancy like you have on offer. Once you have found someone, get permission from the landlord or property manager for the swap to take place. They should agree to this and often they will want the “incoming tenant” to fill out an application so they can collect the necessary information on the new tenant and ensure they are suitable. You’ll want
to make sure your flatmates are happy with the new tenant as well. Once you have ticked all those boxes and everyone is happy and on the same page, have the landlord/property manager remove your name from the lease and record the incoming tenant’s name on the bond record. Your name needs to be taken off the bond record. Finally, the incoming tenant should pay you the share of the bond that you paid at the start of the tenancy because that will be returned to them when the tenancy ends. Some property managers charge a fee for their time in completing the necessary paperwork for you to be replaced on the tenancy agreement. If they do charge a fee, it’s you that should pay. – Ryan Weir

Q Any point getting a chattel valuation done for a new build, or should I just use what I got from the developer?

A To be able to depreciate items of fit-out you can either use your own record of their cost as supplied by the builder or if this is unavailable you can commission a
chattel valuation. To be depreciable the item must not form part of the building and its removal must be possible without causing damage. For example, carpet is
depreciable, but tiling is not. Items like kitchens are not separately depreciable because a dwelling house is not considered complete without one. A chattel valuer will understand exactly what can and can’t be depreciated, which may be an advantage if the builder is unsure what items to identify. – Mark Withers