IRD have recently released a draft QWBA - PUB00260: Income tax — land acquired for a purpose or with an intention of disposal.
The document discusses when section CB 6 of the Income Tax Act 2007 (land acquired with a purpose or intention of disposal) will apply. The QWBA also discusses the relationship between CB 6 and the two-year “bright-line” rule that recently came into law.
The document clarifies what we already knew, but what many out there may not have known is that if land is bought with for a purpose or with an intention of selling, then proceeds of the eventual sale, whenever that occurs, will be taxable income under section CB 6 unless an exclusion applies. Note that the intention or purposes does not have to be the only or dominant one, it just has to be one of them. The test also applies at the time the land was acquired and the onus is on the taxpayer to prove their position.
There are two specific exclusions that apply first to residential land with the second applying to land that is used as a business premises. The QWBA sets out the exclusions as:
Exclusion 1 – Residential land (s CB 16)
If the land has a house on it, or you build one, and you occupy the house mainly as a residence, you will not be taxed on the proceeds from selling the property. This also applies if you are trustee of a trust, and a beneficiary of the trust occupies the house mainly as a residence. Please note that you cannot use this exclusion if you have a regular pattern of acquiring and disposing of houses, or building and disposing of houses.
Exclusion 2 – Business premises (s CB 19)
If the land is the premises of a business, and you acquired and occupied the premises or built and occupied the premises mainly to carry on a substantial business from them, you will not be taxed on the proceeds from selling the property.
As you will recall there was a lot of media coverage around the 2 year bright-line tests introduced recently. The QWBA clarifies that the 2-year bright-line rule is in addition to the other land sale rules that already exists. The 2-year rule is considered to be easy to enforce, by removing the need to determine what a person’s purpose or intention was if they sell residential land within two years of acquiring it. If the 2-year rule doesn’t apply, the proceeds from selling land can still be taxed under one of the other rules, including section CB 6.
While this document doesn’t introduce anything new this is a timely reminder for all with the ever increasing IRD activity in relation to land transactions.
If you wish to comment and make submissions on this then the deadline is 7 April 2016.