New Zealand is a beautiful country and increasingly people from overseas and cities within NZ are retiring to the country. In buying large blocks of rural or city fringe land owners become liable for property taxes. This week Queen City Law tax team specialist Brett Carpenter looks at some aspects of NZ property Law.
Queen City Law have an excellent tax dispute team who are skilled at getting positive settlements for their clients. Lawyers Melinda Li and Brett Carpenter understand NZ tax law and are excellent at getting your case resolved successfully.
Contrary to the view of some of our politicians, New Zealand does not presently have a capital gains tax although there are tax provisions in place for land transactions. A capital gains tax would have no subjective element and simply tax gains regardless of the purpose for which property was acquired. The subject has seen considerable debate over the years and in recent times.
Underpinning any tax regime are the objectives of tax collection:
Sufficiency – ensuring the Government has enough reserves.
Efficiency – collecting revenue as efficiently as possible.
Fairness – treating taxpayers fairly and equally.
The approach of the courts in applying tax legislation must reflect both the scheme and objectives of the legislation. Despite a common ancestor, New Zealand, Australia, Canada and the U.S. did not follow identical or even similar paths in the development of law relating to the treatment of income and capital. In the U.S. capital gain comes within the ordinary meaning of income. Canada, Australia and the U.K. have each introduced Capital Gains Tax to catch profits not previously taxed. In New Zealand, legislation has been framed or at least interpreted as not extending to capital gains (eg “all profits or gains from any business” and “income according to ordinary concepts”).
The difference between the legislation in these jurisdictions means that while the approaches of those courts to legislation which on their face appear similar to that in New Zealand, may be helpful, they will not always reflect the underlying differences. As observed by former Court of Appeal President Sir Ivor Richardson at a tax conference in 1997, there is in New Zealand a lack of published empirical research and analysis of our laws and their administration.
An observation made by Sir Ivor Richardson needs to be kept in mind – it is neither a cynical nor critical remark.
“It is obviously fallacious to assume that revenue legislation has a totally coherent scheme, that it follows a completely consistent pattern in that all its objectives are readily discernible.”
With those comments in mind, it is little wonder that the debate on introduction of a capital gains tax has hardly started. The origin of rules relating to the taxation of personal property in New Zealand can be found in our statutes as early as 1916 although it was not until 1973 that the taxation of land was first dealt with separately.
To the extent that it is possible to simplify any tax legislation the basis for taxing gains derived from the acquisition and sale of land can be described as follows:
Gains derived from the sale of land that was acquired with the intention or for a purpose which included the intention of selling that land is income of the recipient.
Arguably the great majority of people acquire residential property on the basis that it will at some stage be sold; when the family grows; when the owner can afford a bigger house; when a change of job occurs.
Does this mean that just because you are likely to sell a property in the future you acquired it with the intention of selling it for tax purposes?
In essence the intention must be crystallised at the time of acquisition so a vague idea or a possibility of sale in the future will not meet the test. On the other hand an “investment property” may well be caught.
2. The 10 year rule
Where a person derives a gain from disposing of land within 10 years of acquiring it and at the time they acquired the land:
• they were in the business of dealing in land; or
• carried on the business of developing land or dividing land into lots; or
• where a person carries on a scheme or undertaking, which is not necessarily in the nature of a business, involves the development of land into lots and such work is not of a minor nature.
the amount derived will be taxable if the undertaking or scheme was commenced within 10 years of the date of acquisition
The exclusions do not apply where a person has engaged in a regular pattern of acquisition and disposal regardless of their having lived in the property.
When and how these exclusions apply has been the subject of numerous court cases. In one case tax payers carried on the activity of building spec houses although frequently lived in a completed dwelling as their primary residence before selling it. In that case the court held that the dwelling had been erected primarily and principally as a residence.
It is important to remember that the IRD has the benefit of hindsight, it can look back at a tax payers actions as far as it wishes and, notably, it is the taxpayer, not the Commissioner, who has the onus of proving that the land was not acquired with the intention of resale, or that the taxpayer is not in the business of dealing in land. Remember, if the Commissioner issues an assessment because she believes that there are reasonable grounds for doing so then the taxpayer must convince the IRD that no tax is payable. Once an assessment has been issued any tax payable starts accruing interest and, where appropriate, penalties.
Suffice to say here that the easiest way of judging a person’s behaviour is to apply the ‘smell test’. If it looks to you like someone has been buying and selling on a regular basis, they probably have been.
Perhaps the reason that more people have not been assessed for tax under these provisions is a reflection of both the lack of resources on the part of IRD to monitor what is actually happening in the market and, in a tax system which relies on self-assessment, a failure to self assess rather than any defect in the relevant taxing provisions.
A capital gains tax is likely to be much more ‘efficient’ in that it will not require any subjective judgment but simply an acquisition and subsequent disposal of the relevant asset.
For more on Taxing Land in New Zealand click here.
For New Zealand – Property Guides and Articles on Property and Property taxes are available in our Law Library here.
If you have any concerns regarding the possible tax consequences, including GST, of any pending sale or purchase, please contact Brett Carpenter at our office.Contact Us