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Tainted land – what other options now?

The much heralded new associated person rules were introduced for land transactions from 6 October 2009.  There has been a plethora of commentary and articles on the new rules and it is not the intention of this article to add further to that body of work.  Needless to say however it is generally well accepted that the new rules are extremely wide, and difficult to break as far as establishing non-tainted entities for land developers, land dealers and builders (although not impossible in some circumstances, in the author’s opinion).  The purpose of this article is to instead explore the parameters of the exemptions available to land developers, dealers and builders.  In view of the fact that many clients who are in business as land developers, dealers or builders will be “tainted” under the new rules, perhaps now is the time to focus on other ways under the Act to avoid taxation on non-business land.

In this article we will explore the parameters of:

  • the dwellinghouse exemption (section CB 16, ITA 2007);
  • the business premises exemption (section CB 19);
  • a change of purpose or intention

As introduction, persons in the businesses of developing land or dealing in land are exposed to tax on all land which they sell within 10 years of purchase – the only exceptions being land exempted by the dwellinghouse or business premises exemption in sections CB 16 and CB 19.  Similarly associated persons are subject to the same rules.

Persons in the business of erecting buildings (builders), and associated persons of builders, have their own 10-year rule – however for them the goal posts are a moving target in that properties sold within 10 years of completing improvements to them, as distinct from their date of purchase, are in the tax net, (refer section CB 11(1) and (2)).  Again the only exceptions from the tax liability on these transactions are the dwellinghouse and business premises exemptions.

It is also worth noting that the dwellinghouse and business premises exemptions apply equally to land caught by section CB 6 – that is, land acquired with a purpose or intention of sale.  This point will also be explored below for persons who subsequently have a change of purpose or intention.

Dwellinghouse Exemption

The exemption in section CB 16 ensures that land developers, dealers and builders do not pay tax on their private residential dwellings.  The main exception to this is if the landowner engages in a regular pattern of buying and selling (including erecting) dwellinghouses.  This exception is understandable.

The question that is often faced by land developers/dealers or builders is whether they can apply the dwellinghouse exemption to more than one property owned at the same time.  Or more specifically the question is phrased as:

Can land developers/dealers or builders apply the exemption to both their primary home as well as their holiday home?

An example to illustrate:  Bob Builder Ltd is a building and land development company.  Bob buys a beach section in his Family Trust and builds a beach house.  Bob’s family uses the holiday home frequently during the year on weekends and holidays, and when Bob or his family are not using it, it is unoccupied.  Seven years later the Trust is forced to sell following Bob’s divorce.  The Family Trust is associated with the building/development company.  As the property has been sold within 10 years the sale is exposed to tax under section CB 11.  The question is whether the dwellinghouse exemption would apply?

Holiday homes

The exemption in section CB 16 applies if the person acquired the land with a dwellinghouse on it, or subsequently erected the dwellinghouse on the land, and if the dwellinghouse was occupied mainly as a residence by the person and any member of their family.  The exemption also specifically applies to land and dwellinghouse owned by a trust where one or more beneficiaries of the trust occupy it mainly as their residence.

In the author’s view there is no reason in principal why the exemption should not apply to the sale of the holiday home, although the facts of each case must always be fully considered before this is confirmed.  The example given above is one where the sale of the holiday home, although in the first instance falling within the taxing provisions of section CB 11(2), would be exempt from tax under section CB 16.

What is a dwellinghouse?

The word “dwellinghouse” is not defined in the Act nor in standard dictionaries.  However the main part of the word, “dwelling”, is defined as a shelter (as a house) in which people live (Websters) and as a place of residence (Collins).   A synonymous word would be the residence which has a very close meaning, ie. the place where a person resides, his dwelling place (Oxford).  Websters defines “residential” as: used as a residence or by residents.  It also defines “residence” as:  ‘a: the act or fact of dwelling in a place for some time b: the act or fact of living or regularly staying at or in some place for the discharge of a duty or the enjoyment of a benefit.’

In the author’s opinion there is no reason why the ordinary meaning of “dwellinghouse” in section CB 16 should not encompass a holiday home.  As part of New Zealand culture a home of this nature is commonly a “second home”.  The holiday home or beach house  is commonly a place where the owners go to for family holiday times, to get away and reside for a time in the setting in which it is placed.  An important factor in this discussion is the emotional attachment the person has with the particular holiday home, so that it can reasonably be said that it is a dwellinghouse.

Some concepts not too dissimilar are contained in the GST Act where accommodation in a dwelling (as distinct from a commercial dwelling) have differing GST outcomes.  The IRD exposure draft IS0049, issued 18 October 2006, explores the meaning of “a place of residence or abode” and offers some assistance in reaching a view on the dwellinghouse exemption as the ordinary meaning of this word connotes a residence or place of abode.

At paragraph 49 of the IRD draft (IS0049) reference is made to the case R v Bundy (1977) 2 All ER 382.  Mr Bundy was living rough in his car and the argument was whether or not his car was his place of abode.  The court said (emphasis added):

The phrase ‘place of abode’, in our judgment, connotes, first of all, a site. That is the ordinary meaning of the word ‘place’. It is a site at which the occupier intends to abide. So there are two elements in the phrase ‘place of abode’, the element of site and the element of intention. When the appellant took the motor car to a site with the intention of abiding there, then his motor car could be said to be his ‘place of abode’, but when he took it from that site to move it to another site where he intended to abide, the motor car could not be said to be his ‘place of abode’ during transit. When he was arrested by the police he was not intending to abide on the site where he was arrested. It follows that he was not then at his ‘place of abode’. He may have had a ‘place of abode’ the previous night, but he was away from it at the time of his arrest.”

At paragraph 52 IRD states “at first glance much of the case law considering “residence” and “abode” seems to indicate that a degree of permanence is required to satisfy both these terms. However, the requirement of permanency invariably arises as a result of the particular legislation under consideration. The legislation uses words such as “permanent”, “principal”, or “usual” to colour the meaning of abode and residence. Cases considering these phrases are generally concerned with determining a person’s primary place of residence or abode in order to attach some privilege or obligation, e.g. the right to vote in an electorate or the requirement to pay tax. Where this legislative requirement for permanency is absent, there is nothing in the contextually relevant ordinary meaning of the words “residence” or “abode” which requires it. Indeed, the case law itself indicates that a temporary or transitory place of abode is still a place of abode, even if it may not satisfy the requirements for a person’s permanent or usual place of abode.”

Section CB 16 does not use words which require the dwellinghouse to be interpreted as the “primary” or “usual” dwellinghouse.  Instead the word which adds colour – the word “mainly” – qualifies the nature of the person’s occupancy in the dwellinghouse.  In other words, the dwellinghouse must be “occupied mainly as a residence”, rather than in some non-residential way (such as a house which is used mainly for commercial or investment purposes and infrequently by the owners for residential use).

Exempt holiday homes

Case F92 (1984) 6 NZTC 60,017 supports that the exemption in section CB 16 should be interpreted widely enough to cover the holiday home in the example used earlier.  While that case dealt specifically with land tax, the principles applied by the TRA suggest that a court would be willing to apply these to similar issues under other Revenue Acts, such as the exemption in section CB 16.

The company in Case F92 operated a 35 acre beachside holiday camp. On the site were 219 buildings used for residential purposes together with 23 other buildings providing camp amenities and recreational facilities.  The residences were occupied by shareholders on weekends and during holidays.  Casual camping and caravanning on the site was also permitted.  The Taxation Review Authority held that the company was entitled to the land tax exemption for flat-owning companies under the former section 21(1)(m).  It was, it said, a company whose principal object was the ownership of residential flats.  The holiday units may properly be regarded as residential flats. The word “residential” can be related to residences of a holiday home nature even though they are not permanently occupied. A flat need not be an apartment or suite of rooms together with other flats in the same building. It may be a self contained building separate from other buildings.

The TRA referred to the case Dempster and Attwell v C of IR (1983) 1 NZDSC 70,073.  The objectors had entered into a contract to purchase a beach cottage for use as a holiday home for themselves and their families. Their application for the reduction in conveyance duty permitted by section 24A of the Stamp and Cheque Duties Act 1971 was declined by the Commissioner. He based his decision on the assumption that the word “residence” in section 24A must be read as “principal residence”. The objectors argued that the beach house in question was a dwellinghouse for occupation by themselves or their families primarily or principally as a residence. They argued that the words “primarily or principally” in section 24A must refer to and qualify the word “occupier” and that they do not apply to or limit the word “residence”.

The court held that the word “residence” is to be given a flexible meaning. The language of section 24A does not require “residence” to be read as “principal residence”. The basic rule that legislation should be construed according to the intendment of its language as determined on its ordinary grammatical construction applies to taxing statutes such as the Stamp and Cheque Duties Act 1971.  The court stated:

“It had been a principal point in Mr Shepheard’s argument that the words “primarily or principally” must refer to and qualify the word “occupier”, and that they did not apply to or limit the word “residence”. Mr Fardell not only accepted that “primarily or principally” must refer to “occupier” but also that the form and language of the section established that its emphasis is on the use to which the property is to be put, its use as a residence by the purchaser and/or the members of the purchaser’s family.

I have no doubt that those concessions were appropriate, and indeed inevitable. What is not so clear is whether they left Mr Fardell room to argue, as he did, that the word “residence” in sec 24A(2) should be construed to mean “the house in which the purchaser normally resided”, “his real residence”, “not a secondary residence or holiday home”. However one phrases the distinction which Mr Fardell sought to make, it seemed to me at the time of the argument, and still does, that the effect of it must be to require the word “residence” to be read as “principal residence”.

Just such a limitation has been made, expressly and unequivocally, in other revenue provisions; see, for example, sec 48A of the Income Tax Act 1976, which applies to premises “used as a taxpayer’s principal place of abode”.

As Mr Shepheard argued, if the draftsman had intended to make such a limitation, he had plenty of precedents to choose from. Nor, if that meaning had been intended, would there have been any particular difficulty in specifying both that the primary purpose for purchasing must be that of occupation for residential purposes, and that the premises must be the principal residence of the purchaser; see, for example, sec 4(1), Income Tax Amendment Act 1981, which applies to:

“any interest in any land … used primarily or partly for the purpose of any business, if a building on that land is occupied as the principal place of abode of the person holding the interest:.”

Both Mr Fardell and Mr Shepheard cited numbers of cases in which the term “residence” has been defined. In my view they all confirm that the term is one of flexible meaning, which has to be interpreted according to its particular context, a view which is given direct support in two of the decisions cited, the first being the Privy Council decision in Sifton v Sifton  [1938] AC 656, the second the decision of Hutchison J in Egmont National Park Board v Blake  [1949] NZLR 177 where he stated at p 181:

“The word ‘reside’ is a word of flexible meaning. In its usual meaning, a person is said to reside where he sleeps. The fact that he may be away at work somewhere else in the daytime does not mean that he is not residing at the home to which he returns at night. In this expression, the words ‘permanently and continuously’ are used. The word ‘continuously’ would no doubt preclude the tenant from taking a holiday away from the hostel, but I do not think that either it or the word ‘permanently’, or the two words in conjunction, go far enough to make the clause mean what counsel for the plaintiff Board contended it did — that is, that the tenant was to be continuously present at the hostel all the time.”

On the basis that the section CB 16 exemption is contained in a taxing statute the courts, in the author’s view, are likely to take into account precedential decisions in relation to other taxing statutes.  The cases discussed above, particularly Dempster and Attwell v C of IR, strongly endorse the position that the dwellinghouse exemption in section CB 16 can, and should, cover a person’s holiday home.   The author suggests that the correct emphasis in section CB 16 is with the emotional connection the taxpayer has with the holiday home, including the fact that the taxpayer and family go to the holiday home for varying periods year after year, cooking meals, taking part in recreational pursuits or just relaxing and socialising, and basically living life in a normal human manner on a continuing basis in the holiday home.  The holiday home in this setting would be furnished with the normal family items, chattels, paintings, CDs, and so on, which go to make a house into a family home.

Some holiday homes not covered

By contrast if, in the example given earlier, Bob the Builder  mainly rented the holiday home out for short-term or longer-term rental, and the family’s use was restricted to available free periods when not rented, it is unlikely that the exemption in section CB 16 would apply.  It could not be said in this case that the person (Bob and other beneficiaries of the trust) occupy the dwellinghouse mainly as their residence.  Their occupancy is too fleeting and infrequent to meet this test and is flavoured by the predominant investment/business use of the property.

Business Premises Exemption

The exemption in section CB 19 ensures that land developers, dealers and builders, and associated persons, do not pay tax on the sale of their business premises.   Again, the main exception to this is if the landowner engages in a regular pattern of buying and selling (including erecting) business premises.

The difficulty often encountered is where a separate entity is set up to own the land and buildings with the trading operations in a separate entity which leases the land and buildings from the landowning entity.  Usually this is done for understandable commercial reasons as it helps protect the land and buildings from potential trading risks in the operating entity.  The following example is reasonably typical and will be explored further.

Example:  Tom is a land developer and builder operating via a company ABC Ltd.  He has another company, XYZ Ltd, which owns a commercial building.  The building is leased to 6 tenants for office space, each separate businesses.  One of the tenants includes ABC Ltd which leases an office as it headquarters for its land development and building business.  XYZ Ltd unexpectedly is forced to sell the building after 9 years of ownership.  At first glance the gain on sale of the property by XYZ Ltd is taxable under section CB 9 as XYZ Ltd, an associated person, is tainted by ABC Ltd.  The question however is whether XYZ Ltd can rely on the business premises exemption in section CB 19?

The key requirements of this exemption which must apply to the landowning company (XYZ Ltd in the above example) are:

  • the company must acquire and occupy, or erect and occupy, the premises;
  • the premises must be acquired/erected and occupied mainly as the company’s business premises
  • the premises must be a site from which substantial business is carried on by the company
  • the company must not have a pattern of buying and selling business premises.

Occupancy of premises

The immediate problem for the company is whether it can be said it occupies the premises if they are leased out to the various tenants.

Case D20 (1979) 4 NZTC 60,558 dealt with the former provision in the 1954 Act.  In that case the taxpayers made up a 10-member partnership whose principal activity was dealing in speculative properties, but who also embarked on a rental investment.  The partnership acquired land that consisted of a house and a block of five motel units.  As the property was near a hospital, with a view to attracting custom therefrom, the partnership converted the units into fully furnished flats.  The property was sold after 3 years due to financial pressure and the issue was whether the profits would be exempt under the forerunner to section CB 19.

Counsel for the taxpayer contended that the property (referred to as the “ZA property”) was acquired and occupied by the partnership for the purpose of letting the individual units separately, citing Newcastle City Council v Royal Newcastle Hospital [1959] 1 All E.R. 734 and Kerry v Hughes [1957] N.Z.L.R. 850.  In the judges conclusion it seems he recognised that the rental property could in fact be acquired and occupied by the partnership for rental purposes, albeit a rental investment rather than a rental business.  His Honour stated (emphasis added):

“I turn now to the other argument put forward by Counsel for the Objectors should I find that the Objectors were dealers in land. He submitted that the provisions of sec. 88AA(2)(a) (supra) applied and the profits arising from the sale of the ZA property exempted thereby from assessment for taxation.

Attention is immediately focused on the words “primarily and principally as premises from which substantial business was carried on by the taxpayer”. ….The necessity to spend 10 hours a week only in dealing with matters affecting the ZA property does not, I consider, constitute the ZA property as being “premises from which substantial business was carried on”. In any case to fall within the terms of the relevant subsection, the ZA property must have been acquired and occupied primarily and principally for business purposes. The facts disclosed in evidence demonstrate that the ZA property was acquired and occupied primarily or principally for investment, so that the units erected thereon could be let and the rents thereof received as part of the business of the partnership. “

So, while confirming the Commissioners assessment in this case because of the failure to show a substantial business, the judge appears to acknowledge a legal principle that occupancy of premises by a landlord is entirely possible.

The Newcastle City Council case sets out a test of occupation, as opposed to legal possession, which requires a sufficient measure of control to prevent strangers from interfering.  Lord Denning stated (emphasis added):

“There must be something actually done on the land, not necessarily on the whole but on part in respect of the whole.  No one would describe a bombed site or an empty unlocked house as ‘occupied’ by anyone; but everyone would say that a farmer ‘occupies’ the whole of his farm  even though he does not set foot in the woodlands within it from one year to another.”

Kerry v Hughes, a Court of Appeal decision, concerned a property purchased by Mr Hughes, which included a hall and some additional rooms let to a tenant organisation, the Squadron of the Legion of Frontiersmen.  The organisation used the rooms one or two nights a week, and for other nights sublet it to others.  Mr Hughes in seeking possession, did not desire to oust the tenant on the nights which it wanted the rooms.  He wanted possession of the premises so that he himself could hire out the hall to different hirers from night to night.  In finding for Mr Hughes the Court states at p 853 (emphasis added):

“I doubt whether the requirement of actual physical presence can be put as high as Mr Henry puts it, particularly having regard to the basis of the judgement of the Privy Council in McKenna v Porter Motors Ltd [1956] NZLR 845, and to the decision of this Court in McKenzie’s case (supra), but even if Mr Henry be correct, I consider there will be continuous occupation by the landlord in the case before us.  As I have pointed out, even where there is a hiring in operation – and that must cover only a portion of the time – there will be a significant degree of occupation remaining in the landlord.  As Denning LJ, as he was then,  said in Hills (Patents) Ltd v Board of Governors of University College Hospital [1956] 1 QB 90 … ‘Possession in law is, of course, single and exclusive; but occupation may be shared with others or on behalf of others.’”

The case precedent confirms a legal principle that from a literal and common law perspective, occupation remains in the landlord company (XYZ Ltd in our example), notwithstanding that the premises are leased to various tenants who enjoy full legal possession.

Substantial premises

This involves a two-fold question.  Does the landowner’s activity of rental constitute a “business” and if so is it a “substantial” business.  The Commissioner in his binding ruling on lease surrender payments discussed the question of a landlord being in business (see TIB Vol 13 No 1 January 2001), and noted that:

  • In L D Nathan Group Properties Ltd v CIR (1980) 4 NZTC 61,602, the taxpayer was the property owning subsidiary of the group. Davison CJ said that the deriving of rents by a company such as the taxpayer was income from a business. This confirms the approach in Smith v Anderson (1880) 15 Ch D 258, CIT v Hanover Agencies Limited [1967] 1 All ER 954 (PC), and American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1978] 3 All ER 1185 (PC) that companies involved in leasing will readily be held to be in the business of property leasing.
  • From these cases, it would appear that leasing a number of buildings is likely to mean the taxpayer is in the business of property leasing. Leasing only one building can also mean the taxpayer is in the business of property leasing, if the requirements of the building mean the landlord is actively and regularly involved with the property (e.g. negotiating new leases, maintenance, renovations, etc.).
  • It is interesting to note that the cases suggest that the business threshold is lower when the landlord is a company than when the landlord is an individual or individuals.

In the example above the landowning company’s (XYZ Ltd) sole activity is that of owning and leasing the commercial premises.  It has no other activity.  As the company was incorporated for the sole purpose of owning and leasing, together with the managing of six separate tenants, it is reasonable to conclude that the company has a “business” of leasing.

It is also reasonable to conclude that the company’s leasing activity is a “substantial business”.  The word “substantial” takes its ordinary meaning, which in this context means ‘ample to satisfy and nourish, fundamental; significant, considerable in quantity, significantly great, firmly constructed’ (Websters).  Given that it is the company’s sole business operation with the control and management of six separate tenancies it is a substantial business.

Turning back to the example given earlier it is the authors view that the sale of the building by XYZ Ltd is exempt under the business premises exemption in section CB 19.

Premises and surrounding farmland

Section CB 19(3) extends the area of land to include land reserved with the premises for the use of the business.

Case Y10 (2007) 23 NZTC 13,097 dealt with the sale of farm land which the Commissioner argued was caught under the earlier version of section CB 6 – land acquired with the purpose or intention of sale.  The taxpayers had held 1,400 hectares of high country South Island rural freehold land as a sheep station and it was sold in circumstances which gave rise to the Commissioners allegations.  The TRA was asked to consider the business premises exemption should the Commissioner be found correct in respect of his argument under section CB 6.

As it transpired the TRA found that the sale of land was not taxable under section CB 6 and the business premises exemption was somewhat redundant.  Nevertheless Barber DJ made some obiter comments on the point.  His Honour noted the submissions for the taxpayer and the meaning given to the word “premises” by the courts in reasonably similar contexts.  The case relied on by the taxpayer was Thames Water Limited v Hampstead Homes Limited [2003] 1 WLR 198 where the court said:

“Premises”, it seems to me, will usually include buildings but may not be limited to buildings and might in some circumstances refer to a place with few or no buildings on it.  Premises may in its context also consist of a part of a larger building.  A garden centre of a builder’s merchant may have premises which include one or more buildings but the  premises may extend to the larger site used for the keeping of plants or bricks and sand.   A garden centre might conceivably have premises with no buildings on it at all.  The premises of a farming business might consist of a group of farm buildings but it would be a somewhat strange context perhaps, though not impossible, which included 100 acres of fields as part of the farm premises. The premises of a large corporation might in context consist of the entirety of a large office block.”

In summing up on this point Barber DJ thought that the exemption would need to be apportioned, stating “…part of the farmhouse, the implement sheds, the woolshed, and a reasonable amount of land associated with same (curtilage) should be eligible for the exemption on a reasonable valuation basis ...”  It appears that he might have been influenced by some doubt that the 1,400 hectare sheep farm was a going concern and therefore the fact that not all the land was sufficiently connected with the farm premises, ie:

“Farming does not fit into the exemption concept as easily as an office building, but farming also requires business premises as well as farmland. I do not know whether the disputants’ sale of the sheep-station to the family company was as a going concern or not; but I understand that some of the farm is still used as a sheep farm but most of it was very soon converted by the purchaser into a vineyard …”

“Mr Beck is correct that there has been insufficient evidence before me as to what buildings there are, how they are occupied, or what business was carried on there; except that, by consent, I took a view of much of the sheep-station as it now remains, for it seems to now be mainly a vineyard and winery …”

Although on the facts of this case, Barber DJ would apparently not have extended the exemption to the entire 1,400 hectares, it seems he would not have taken as narrow a view as submitted by the Commissioner.  The Commissioner appears to argue that the exemption would be limited to the buildings and immediately surrounding land.  However His Honour said:

“In terms of Mr Beck’s reference to views of Professor John Prebble in “The Taxation of Property Transactions”, one would always respect that Professor’s views. He must be correct in opining that the exemption section contemplates that the buildings must be of relatively greater importance than the land, although I would prefer to put it that the buildings are the focus for any such exemption rather than land. Mr Beck submitted that, in the present case, any buildings are an insignificant proportion of the whole (sheep-station). That must be correct with regard to value, but it would be difficult to operate a sheep-station without a farmhouse cum office, woolsheds, implement sheds, and the like. It seems to me that part of the farmhouse must be regarded as private residential premises rather than business premises but a substantial amount of the farmhouse would be used for office and management purposes and, probably, for providing food for staff and farm-workers and meetings with them and the like.”

On appeal to the High Court (C of IR v Boanas & Ors (2008) 23 NZTC 22,046) the business premises exemption was not required to be considered as the court found in favour of the taxpayer that section CB 6 did not apply.

So where does this leave us?  It seems to the author that there is no reason in principle why the exemption in section CB 19 should not apply to the entirety of a farm, whether 1,400 hectares or more or less.  Providing there are no detrimental factors like the lack of a going concern farm activity on the land, which apparently existed in Case Y10, the entire farmland should be accepted under section CB 19(3) as land reserved with the premises for the use of the business.  In the author’s view there is no warrant for limiting the exemption to land immediately surrounding the farm buildings and sheds.  The case cited above Thames Water Limited v Hampstead Homes Limited, surely supports this approach and it seems that the Parliamentary intention of section CB 19(3) requires one to examine the actual use of the land and its importance to the business and premises.  In a normal farming business this must include the entire farm.

This discussion might appear academic and unlikely ever to be applied.  However the new associated person rules are of such breadth that it would not be difficult for a client’s farming company to be tainted with the client’s land development company.  If the client were forced to sell the farm within 10 years for unforeseen reasons this transaction would be in the tax net unless the interpretation of section CB 19(3) could be applied in the manner outlined above.

Change in purpose or intention

As noted at the beginning land which is acquired with a purpose or intention of sale is caught under section CB 6.  In many cases this land is forever trapped in the tax net unless, when it is sold, it qualifies for the exemptions in sections CB 16 or CB 19.

Both the exemptions are clear that they apply to land caught by section CB 6 as they do for land caught by the tainting rules for land developers, dealers or builder.

The point this raises can be most simply illustrated in the following example.

Joe is not a property developer, however he sees a good opportunity and buys a section in town meaning to subdivide for a townhouse development.  He registers for GST and claims an input deduction.  A year after purchase he is forced to sell his family home for financial reasons, so he decides to build a new home on the section.  This he does and lives happily in his new home for 8 years, at which point he decides to sell as the home has become too small for his growing family.  Joe does not have a pattern of buying and selling family homes.

At first glance the sale of the property is taxable under section CB 6 as it was acquired with a clear purpose or intention of sale.  However the dwellinghouse exemption in section CB 16 will apply as the land, although initially purchased for a speculative venture, was in fact used mainly as his place of residence.  The only tax adjustment Joe would make is for GST as his planned taxable activity has ceased causing a deregistration liability.

The point this illustrates is that the Act permits a change of use from taxable to either residential or business premises.

As this article attempts to show there is always more to consider when land appears to be caught in the tax net.

One Response

RM Hawkins on March 24, 2011 at 2:55 pm

Super article. Can you tell me how to get a copy of the draft IS 0049, please? I think that the comments referring to commercial dwelling” and “dwelling” that are contained in the draft will be very interesting given the previous IRD position with respect to unserviced apartments in a retirement village.


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