Home, Land and Tax

Don’t be stung with unnecessary tax and GST implications when buying or selling a property

When you are buying or selling a property, you need to take into account the tax implications. Depending on your situation, there may be both GST and income tax considerations that you will need to work through.

GST treatment for land transactions

Generally, where two GST registered-parties enter into a transaction involving land, the transaction will be zero-rated (0% GST rate), as long as the purchaser acquires the land with the intention of using it to make taxable supplies (for example run their business from it, or it is a commercial building being leased); and the land is not intended to be used as the principal place of residence by the purchaser or their relatives.

A purchaser has to fulfill several obligations when an agreement is entered into, and the sale is going to be zero-rated. These include:

• Providing a written statement to the vendor stating that at the date of settlement they are, or expect to be, GST registered.
• Providing their GST registration number to the vendor at the time of settlement (or before).
• Confirming their intended use of the land (ie, it will be used to make taxable supplies and it will not be used as a principal place of residence).

Things are a bit easier for the vendor. Once a written statement is obtained from the purchaser, the vendor may rely entirely on the information provided to either standard-rate (15% GST) or zero-rate (0% GST) the transaction.

Therefore, if the written statement indicates the conditions to zero-rate the transaction are, or will be, met, the vendor may zero-rate the supply. If the statement indicates otherwise, the vendor should standard-rate the supply.

If the purchaser does not provide a written statement regarding their GST registration status and intentions for the land, the vendor should standard-rate the transaction.

As simple as it sounds above, the changes have resulted in a number of parties (both vendors and purchasers) not understanding the transaction correctly. This includes whether the sale price is recorded as inclusive or exclusive of GST and either being required to pay GST when they thought they weren’t, or being unable to claim GST when they thought they’d be able to.

“The taxation of land transactions is not always straightforward. In some cases, there are additional requirements that need to be met for any gain to be taxable

Income tax – will you be taxed on any gains?

Under income tax legislation, there are a number of ways that gains made on property can be taxable. For most people, the sale of land will be the sale of a capital asset, and will not attract a tax liability. However, where a person carries out a business-like activity relating to land, or are associated to a person carrying out such an activity, they may be taxed on any gains.

Taxable income includes:

• Any amount you derived from the sale of land, where that land was acquired with the intention of selling it, is treated as taxable income.
• Any income received by being in the business of dealing in land, or being associated with such a person. This includes the proceeds of the sale of land, if that land was acquired for the purposes of that land dealing business, or if the land was sold within ten years of acquiring it, regardless of the intention of that land.
• Any income from being in the business of developing or dividing land into lots or associated to a person carrying out that business. It includes the proceeds of the sale of land acquired for the purposes of that business or sold within ten years of the taxpayer acquiring it, if it was not acquired for the purposes of that business.
• Any income from being in the business of erecting buildings on land, or associated to a person carrying out that business. It includes the proceeds of the sale of land the taxpayer has improved, where the taxpayer acquired the land for the business or sold it within ten years of completing the improvements if it was not bought for the purposes of the building business.
• Any income received from the sale of land that has been the subject of an undertaking or scheme involving development and subdivision work of more than a minor nature, where the scheme commenced within ten years of the taxpayer acquiring the land.
• Any income that has not been treated as taxable above, and is received from the disposal of land which has been an undertaking or scheme, which has included development or division into lots, where the work involves significant expenditure on earthworks, contouring, levelling, drainage, roading, kerbing or channelling or any other work usually undertaken in major projects involving the development of land for industrial, commercial or residential purposes.
• If the sale of the land has not been treated as taxable under one of the above, then it may be taxed where a zoning change or resource consent has resulted in an increase in the value of the land, and the taxpayer sells the land within ten years of having purchased it.

The taxation of land transactions is not always straightforward, as the above cases show. In some cases, there are additional requirements that need to be met for any gain to be taxable. It’s important to discuss property transactions with your advisor before you enter into a transaction to ensure you’re getting it right.

If you are currently looking to sell or buy some land and would like to discuss any tax implications, please contact Ryan Watt at ryan.watt@crowehorwath.co.nz or your local Crowe Horwath advisor.

For the contact details of your local office, please visit: www.crowehorwath.co.nz/locations or phone 0800 494 569.