Property speculators warned to pay tax on profits

By ANNE GIBSON

Aucklanders reaping rewards from the booming housing market have been warned against attempting to evade tax after a speculative property boom in Wanaka and Queenstown resulted in Inland Revenue sending four investigative units there.

Institute of Chartered Accountants tax director Annabel Young said Auckland's property boom could also catch out people who were trying to sidestep tax rules.

Although New Zealand has no capital gains tax, people who buy and sell properties often, intending to make a profit, can be taxed and are sometimes liable to pay the top marginal tax rate of 39 per cent on the profit.

But IRD's South Island service centre manager, Carson McNeill, said the tax was particularly aimed at speculative property transactions.

IRD was also concerned about property companies established to minimise tax payments on deals and in some cases pay no tax, McNeill said.

"We have determined that certain business structures - principally companies - have been specifically formed to avoid tax in a way not intended by the law," he said.

This was achieved in the way those structures were established and how they bought and sold properties, particularly in relation to the timing of deals, the sourcing of deals and conditional arrangements entered into.

He said about 10 per cent of IRD's auditing activities were on property deals.

Young said investigative audit teams from IRD had moved into Queenstown and Wanaka for an indefinite period to examine taxable activities.

"Particularly in Wanaka, where there are large residential subdivisions and properties are changing hands within an hour," she said.

IRD had sent the teams in because of the amount of property speculation and because it did not have offices in those areas. Its nearest branch was in Dunedin.

"But there are tax audit units which live in Auckland," Young said, adding that the speculative housing market in Auckland would also be catching IRD's eye.

She warned Aucklanders who were active property traders that a paper trail could be their undoing, as records kept by banks, councils and other organisations could be accessed by IRD.

"It's often the notes that catch people out."

People who had just sold a family home which they had owned for 20 years and did not actively trade properties were not liable to pay tax of their profits, Young said.

But those who had sold properties they claimed to be their family home would be viewed by IRD in a different way. "The point that most people get tripped up is when they do this more than once," she said.

She urged Aucklanders who had sold properties but were uncertain of their tax liability to seek professional help from a professional chartered accountant.

McNeill said late last year that IRD always kept an eye on property development and speculation, particularly in areas of rapidly rising prices like Queenstown or Wanaka where there was a risk to the tax revenue base as people hoped to make quick profits by buying and on-selling quickly.

McNeill said at the time that many people buying sections in new developments might not be aware of tax implications if they on-sold the properties within a short time.

"If they are buying property purely to on-sell it and make a quick profit, they will be liable for tax on any profit made," he said in October.

Anecdotes were circulating of people hoping to sell property at a profit before they had completed paying for it.

This type of situation was not unusual in property development in a rising property market.