Most people are now aware of the "bright-line" test that can apply to tax gains derived on the sale of residential land.
The test appears relatively simple on its face: if you sell residential land other than the family home within five years, any gain derived is taxable.
However, as is typical with tax matters, there are various pitfalls for the unwary and we are still seeing a degree of misunderstanding in the market with respect to the parameters of the "bright-line" rule.
First, as a starting point before you even contemplate the detail, it is important to remember that there are currently three timing categories in relation to which residential land could fit:
(1) the land may not be subject to the "bright-line" at all if it was acquired pre-October 2015;
(2) the land may be subject to a two-year test if it was acquired between October 1, 2015 and March 28, 2018;
and (3) the land may be subject to the new five year test if it was acquired on or after March 29, 2018. Therefore, if you're proposing to sell a piece of land now that you acquired in 2015, do not resign yourself to the fact that the "bright-line" will apply.
Second, bear in mind that any change in legal ownership of residential land may crystallise a disposal and reset the clock on the five-year threshold.
This is the case even if the land is substantively owned or controlled by the same person.
For example, transferring land from one family trust to another means the land is now owned by a different taxpayer. That gives rise to a disposal and resets the acquisition date in relation to the land.
Furthermore, if you own land jointly in 50/50 shares (such as in a partnership) and one of the joint owners buys the other out, that will again be regarded as a disposal.
Importantly, the entire parcel of land should be regarded as having been disposed and not just the half share acquired from the departing owner or partner.
This is because there has strictly been a change in legal ownership in relation to the entire parcel. The land was previously jointly owned and is now owned outright by one individual.
There is also a rule that deems a market value disposal on the dissolution of a partnership.
Finally, remember there are certain specific exceptions to the "bright line" rule.
For example, the rule does not apply to a disposal of property received by way of inheritance. In addition, relief is provided where residential land is transferred under a relationship property agreement.
It is therefore important to keep your professional advisors informed as even the most innocuous transaction or change in circumstances may have a material impact on the tax position.
- Greg Neill is a tax partner at Crowe Horwath - Hawke's Bay.