Inland Revenue to Escalate Investigations into Land Sales
While no comprehensive capital gains tax is being considered in New Zealand at present, there is already a full body of tax law relating to land. The misconceptions as to the taxability of land is only fuelled by television programmes such as “The Block” where people are to “do up” a run-down property and then sell it, hopefully for a profit. The winner receives a prize which in part is connected to the sale price of the property. I am unaware of the tax implications of such activities being discussed on the programme. In this example, the contestant receives prize money and, while connected to the sale price of the property, the house is not owned by the contestants. However, viewers do not necessarily understand the difference here, and are often left thinking that renovating a property and selling it will lead to a big profit, with no understanding of the tax implications.
During last week’s national tax conference we heard that Inland Revenue investigators have a particular focus on enforcing compliance with the land tax rules. All Inland Revenue auditors were refocused back to audit work from 1 August 2019 (post Inland Revenue transformation rollout) and will continue to escalate their investigations.
Inland Revenue have a plethora of information regarding land transactions. The transformation has allowed Inland Revenue to use this data more easily and much quicker than before. The current compliance rate relating to land is approximately 50%, which rises to 73% after Inland Revenue has completed their intervention. Inland Revenue has set the compliance target to as close to 100% as possible. Land tax is a key part of Inland Revenue’s tax policy work programme.
The first measure introduced to assist Inland Revenue with compliance of the land tax rules is the requirement to provide IRD numbers for all land sales, even when it is the main home. This change applies from 1 January 2020. The main home exemption can still apply to the tax status of the land but the information will be provided to Inland Revenue to assist with ensuring tax compliance.
On 16 September, Policy and Strategy within Inland Revenue released a tax consultation document relating to the habitual buying and selling of land due to concerns that the current restrictions relating to regular pattern restrictions were not working as intended. The consultation document is not law, its purpose is to ask for submissions on the proposed solutions to address the issue identified.
Laws that impose tax on the sale of land contain exclusions from tax for people that use the land as their main home, residence or as their business premise. These exclusions do not apply where the taxpayer has a regular pattern of buying and selling land used as their main home, residence or business premise. The reason for this is that it is assumed that a taxpayer that regularly buys and sells land will primarily do so for the purpose of sale, which is taxable to them regardless of the use of the land.
The issue identified is that the exclusions as currently drafted in legislation can be manipulated by using various associated persons to carry out the different transactions, or by varying the transaction so that there is no pattern. This creates a loop-hole which has undermined the integrity of the tax system. The proposals focus on looking at the patterns within a group of persons rather than an individual person, as well as looking at the various activities carried out on the land while it is owned. Officials consider that the regular pattern restrictions should apply more broadly to any pattern of buying and selling land used as a residence or business premise. It should not matter whether the properties were renovated, building work was undertaken or they were simply bought and sold. The relevant point should be the regularity of the transactions.
The above is intended for informational purposes only and should not replace specific tax advice. For personalised advice on all tax issues please contact Julia Johnston at Saunders & Co.
Please note that the bright-line test has been updated. For more information, see the following Property Investors Hit Hard by Tax Reforms.