New Zealanders have always had a passion for investing in land.
Before the recession, many taxpayers recognised an opportunity to benefit from the sky-rocketing property prices and bought and sold properties.
If there was value in subdividing off a portion of their land, then it seemed that everyone was keen to give this a go.
The recession slowed this activity almost completely, but in recent months we have begun to once again see investment activity increasing in the property market.
Many taxpayers are somewhat surprised when, after buying and selling a property for a profit, they receive a letter from the Inland Revenue Department notifying that they should have returned tax on the sale.
This should not be surprising, as the Inland Revenue Department has access to electronic records of any property transfers and can run reports on those selling shortly after acquiring, or those selling on a regular basis.
We often have taxpayers asking how many properties they can buy and sell before they have to pay tax.
The answer is that there is no set number of sales before they become taxable. One sale, if the property was acquired with the intention of sale, will be taxable.
The provisions relating to land sales are complex and, while they contain some exclusions, these can, at times, be limited.
It is important to understand the implications of these tax provisions prior to buying or selling land, as in many situations, paying tax from the profit may make the potential return negligible.
One area, in particular, which has created uncertainty in the past is in relation to remainder land.
Take the situation where John and Mary purchase a large plot of land and intend to subdivide off several properties.
As part of the subdivision activity, they intend to retain one of the sections to be used as their personal home.
The issue has always been that as part of the land was acquired as part of a subdivision scheme, all of the land would be taxable (upon eventual sale).
The Inland Revenue Department last month issued a draft "Questions We've Been Asked" in relation to this point to clarify its interpretation.
While this has not yet been finalised, it indicates the commissioner's considered view on the position.
The draft outlines that in the situation mentioned above with John and Mary, if they can prove that the section they retained was always intended to be retained, then its eventual sale should not be taxable.
While the application will be dependent upon the specific facts, it does give some comfort to those intending to retain part of a property following a taxable subdivision.
For those considering acquiring a property to be subdivided or developed, or for resale, it is important to get specialist tax advice before buying or selling the property, to ensure that you fully understand the impact of the tax provisions.
Scott Mason is a tax principal at WHK Taylor.
