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When is work more than minor?

The introduction of safe harbour thresholds brings a degree of certainty to this vexed question, writes Mark Withers.

By: Mark Withers

28 June 2023

Investors who have investigated or undertaken division or development with their investment property are likely to have had to come to grips with section CB12 of the Income Tax Act.

Section CB12 is one of the commonly cited land taxing provisions which can tax the disposal gains from land developed or divided within 10 years of acquisition where the work associated is “more than minor”.

The section has four exclusions which include schemes that result in residential occupation by the taxpayer; the creation of business premises; farming and agricultural businesses; and developments undertaken to derive investment income like rent. So what’s an example of a scheme of development that might be subject to tax under CB12?

New section

Here’s an example. Joe purchases a rental property for the purpose of deriving rental income. It sits on a large site that allows subdivision without a zoning change. He decides to subdivide and creates a new section of land. He begins the process within 10 years of having acquired the section. Rather than retain the section and add another rental property to the land he decides to sell the section and reduce his overall debt.

Because his scheme of division was started within 10 years and does not attract the benefit of any of the exclusions to the taxing provisions, Joe stands to be taxed on his gain, unless his scheme falls below the bar of being considered “minor” in nature.

The question of determining whether schemes are minor or not is therefore critical to the taxing outcome.

The IRD approach to the question has been to require the matter to be considered in both absolute terms (is the total cost significant in and of itself?) and in relative terms (is the cost significant relative to the value of the land that is the subject of the scheme prior to it being developed or divided?).

While this criteria was useful it did not offer guidance on exactly where the all-important limits lay. For many years the bar was considered to be extremely low due to common law decisions on the questions that were in favour of the IRD.

Last resort

In the case of Costello v CIR the taxpayer spent $1,700 on legal fees associated with a unit titling scheme to separate flats in a block onto their own title. Despite involving no physical work and being minor in absolute terms the Court of Appeal held for the commissioner on the basis that the works were still more than minor in relative terms.

Following this judgment tax practitioners often felt that reliance on an argument that works were minor was an argument of last resort.

Recently, the IRD has released Interpretation Statement IS 20/08, which seeks to offer better guidance when assessing if work is more than minor.

The interpretation statement introduces for the first time “safe harbour” thresholds for assessing the cost of work both in an absolute and relative sense.

Absolute costs: $50,000 or below. Relative costs: Less than 5 per cent of the value of the land at the start of the scheme.

Both measures of cost must be considered as it is possible for cost to be low in absolute terms but high in relative terms and vice versa.

Development work typically includes fencing, demolishing buildings, site clearing, earth moving, installation of services, creating driveways, legal work, zoning applications, drafting engineering plans and entering contracts for physical development work, but excludes erecting buildings.


Divisional work includes planning and preparation of formal plans, survey work, obtaining consents and permits, legal work, including the deposit of subdivisional plans, and the issuing of separate titles. Interestingly, boundary adjustments are considered to fall within the scope of CB12 and are considered to be divisional work even though new titles are not created.

So, the introduction of these safe harbour thresholds brings a degree of certainty now to the assessment of the vexed question of whether a scheme is minor in nature.

Because of the need to look at the question in absolute and relative terms those seeking to argue their schemes are minor will need to seek valuations of their land prior to the schemes being started so costs can be measured against the value of land to satisfy the relative safe harbour test.

Readers interested in how these safe harbour thresholds will work in practise should read the examples sited in the back of the interpretation statement. Taxpayers should always seek professional tax advice when considering the tax issues associated with developing and subdividing land.

Mark and his 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


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