Partner’s Opinion – Chris Smith
As the value of land increases, we often receive queries as to the implications of subdividing residential land. This can be because of a change in circumstances making land surplus to requirements or the recognition of an opportunity make a gain from what is, these days, a large section.
As always, the Income Tax Act 2007 must be considered. There is a section of the Act that covers off the development or division of land not otherwise acquired for business purposes, that being CB12.
Land will prima facie be considered taxable if:
- An undertaking or scheme, not necessarily in the nature of a business, is carried on.
- It involves the development or division of land into lots.
- The work is not minor.
- The undertaking was commenced within 10 years of the acquisition of the land.
It is important to recognise that to be carrying on an undertaking or scheme does not require a lot, nor does it need to be completed. The commencement and carrying on can be enough to be caught. Also, it is important to note that it is only costs in relation to land that count, not buildings.
Whether or not work was minor was once a grey area. However, a recent interpretation statement released by the Inland Revenue Department (IRD) assisted with a de minimus to use as a guideline, as follows:
- Total cost $50,000.
- Total cost less than 5% of the value of the land.
These two aspects are to be considered together. The commencement date is important given the section only applies to undertakings commenced within 10 years of acquisition. Pre-Construction or planning phases are typically not enough to commence a scheme, an overt act to commit is required. This, however, is very fact based and care is required.
IRD have also said that where an exclusion under the Act does not apply, such as the land being used as a primary place of residence, there can still be relief if it can be proven the undertaking was not carried on for the purpose of selling the land. This is known as the residual land argument. IRD will look to the circumstances and history in respect of the land and the development in considering facts.
This is a brief insight into the care that must be taken from a tax perspective should you be planning a boundary adjustment. Part of your planning should be consideration of tax consequences, no matter how simple the adjustment may be.
