SHANE GIBSON, PARTNER - BUSINESS ADVISORY, CROWE HORWATH WANAKA

Most people will be familiar by now with the "Bright Line” concept test as it applies to residential property purchases transacted post 1 October 2015.

The "brightline test” automatically taxes profits from the sale of non-family home residential properties that are transacted within two years of the date of purchase. The legislation is designed in such a way to widen the two year period as far as possible.

Your purchase date generally begins when the property is settled (not the date of signing the contract) versus the sale date being taken as of the date you sign the contract (not when possession takes place). There are special rules for land that is acquired that has to go through a sub-division process for example so care needs to be taken with those types of agreements in measuring the purchase date.

We are finding however a number of misconceptions being applied to the general thinking around this rule. One of those misconceptions applies to vacant sections where people have drawn up plans to build a house and then decide to sell the land without building the house on the section.

If the sale takes place within the two years there is no residential exemption in this instance. The property must have been the taxpayer’s residential home to qualify for the exemption. Clearly a vacant section doesn’t cut the mustard in this regard.

The gain is treated as taxable income so taxed just like any other source of income by the owner of the property (i.e. husband and wife selling a section will share the gain 50/50). It is important to note that almost all land title changes are recorded with an IRD number so the IRD now have an easy means of matching purchases and sales. We have yet to see any activity from the IRD on the "Brightline test "as the first two year period rolls around in the next week or so.

Tax returns for the relevant period finish on 31 March 2018 so it may be a while before we see how vigilant the IRD is in observing taxpayer compliance.

Another commonly misconstrued idea is once you have passed the two year period of ownership and decide to sell then you have a "get of jail free card” and there will be no tax to pay on any gain.

This is not necessarily always the case where you can skip past the IRD’s front door and not pay your due respects. There is more tax legislation that has been around a lot longer and written specifically to apply to land transactions. Many of these are lesser known so I thought I would cover off some of the pertinent limbs of section CB of the Income Tax Act 2007.

The first and most far reaching sub-section 6 that deals with land purchased with "Intent of Resale”. There is no limitation of time on this section so it captures almost all property purchased with intent for resale no matter how long it is held. The IRD use this section a lot if they believe a transaction is taxable. It’s their fall back "Ace” they play in a lot of tax audits.

The IRD have been known to look to bank and lawyers notes when you seek bank funding approval at the time of purchase to verify intention.

Those of you who are builders will be interested in sub-section 11. This catches profits from land sales within 10 years of completion of improvements upon the land and the improvements commenced when the taxpayer was a builder.

For example if you are a builder and extend a rental property you have owned for 5 years when the work is completed then any sale can be tax free only after 15 years of ownership.

It is important to note that there are many exemptions and limitations to these sections as well as rules of association that effectively deem other people or business entities to take on land developer, builder status. The unintended consequences of this can be more far reaching than many imagine.