Tax perspectives on habitual buying and selling of land
We examine last month’s policy paper issued by the IRD Policy and Strategy team, seeking submissions on proposals to change the existing tax rules relating to the main home, residence and business premises exclusions from tax.
Taxpayers who use land as their main home, residence or business premises are generally not subject to tax on the sale of the land unless they are engaged in a regular pattern of buying and selling land used for that purpose.
The IRD is concerned that the regular pattern rules may not be working as intended. In particular, the IRD has identified two scenarios where taxpayers can effectively engage in a regular pattern of buying and selling property used as their main home, residence or business premises without triggering tax.
Scenario 1: Collaboration between associates
Where taxpayers collaborate with their associates (such as family members or their family trusts) to circumvent the regular pattern restrictions. The IRD gives an example where:
A and B both have a history of buying and selling rundown residential properties to renovate and sell. They both live in the properties while renovating and they sell them within 2 years. Ownership is structured in the following manner:
- Property 1 owned by A.
- Property 2 owned by B.
- Property 3 owned by A Family Trust.
- Property 4 owned by A.
- Property 5 owned by A Property Trust.
In the IRD’s view: Under the current rules, the regular pattern restriction in both the residential exclusion…and the main home exclusion…would not apply. This is because a person has not engaged in a regular pattern of buying and selling land used as a residence or main home of that person.
Scenario 2: Undertaking different activities on the land
Where a taxpayer undertakes different types of activity on the land. The IRD is concerned that the regular pattern restrictions that apply to the residence and business premises exclusions from tax (not including the ‘main home’ exclusion from tax under the ‘bright-line’ test) have been interpreted to apply to patterns of similar activities only. For example, on the current narrow interpretation there is arguably no relevant pattern of buying and selling land (other than for the purposes of the main home exclusion to the ‘bright-line’ test) where a taxpayer engages in a pattern of buying and selling land that involves:
- buying land, building a home on it, living in it for a period, then selling it;
- buying another home, renovating it, living in it for a period, then selling it; and
- buying another home, living in it for a period, then selling it.
In the IRD’s view the above examples should constitute a regular pattern of buying and selling land.
The IRD has three proposals to address the scenarios above:
1. Proposal One: to extend the regular pattern restrictions to apply to activities undertaken by groups of persons or entities
The regular pattern restrictions would apply where:
…a person, or a group of people or entities have a regular pattern of buying and selling land that has been:
- occupied by the person or group of people as their main home, residence or business premises (as applicable); or
- occupied as a main home, residence or business premises (as applicable) by the person or group of people that controls the entity or entities that own the land.
This proposed amendment would apply to Scenario 1, because:
- there is a group of people who have engaged in a regular pattern of buying and selling land;
- the land has been occupied by Mr A and Mrs A as their main home; and
- Mr A and Mrs A either own the land or control the entities that own the land.
2. Proposal Two: any regular pattern of buying and selling should count
Any regular pattern of buying and selling land would trigger the restriction, whether the activities undertaken on the land (e.g. building a new house or renovating an existing house) are similar or not.
3. Proposal Three: include a time-period restriction
The regular pattern restrictions that apply to the residence and business premises exclusions would be buttressed by an additional restriction that prevents these exclusions from being applied more than a certain number of times in a time period (mirroring an existing restriction to the main home exclusion from the ‘bright-line’ test).
IRD says that the proposed changes are not intended to apply to:
- ordinary commercial or family transactions where there is no intention of resale;
- scenarios where people move as a result of a genuine change in circumstances (e.g. to move closer to a good school); or
- where a small business moves as their business expands.
It is expected that any changes will be included in a Bill in early 2020.
If you have any queries about potential changes regarding taxation on buying and selling of land, please contact one of our Property or Tax team experts.