Taxation Implications of Sale of Land in New Zealand

Running head: TAXATION
Taxation
Name of the Student:
Name of the University:
Authors Note:

1
TAXATION
Contents
Introduction:....................................................................................................................................2
Part A:..............................................................................................................................................2
Part B:..............................................................................................................................................9
References:....................................................................................................................................14

2
TAXATION
Introduction:
Income Tax Act, 2007 is the premier tax legislation in New Zealand. The facts provided
in the individual cases shall be evaluated from the point of view of Income Tax Act, 2007. Based
on the findings a detailed report shall be prepared to recommend the right course of action to the
specific circumstances and situations.
To,
Tim Neil.
CC: Lacey Neil.
Re: Outlining tax implications of the profits on sale of seven lots of land.
Respected sir / madam,
This letter is in reference to the above subject matter. Using appropriate provisions of Income
Tax Act 2007 a detailed discussion on the tax implications are provided below.
Part A:
Issue:
1. The intention of acquiring the land at the first instance by the buyers.
2. Does building a dwelling in one part of the land renders the entire property the exemption status
under main home clause of Income Tax Act 2007?
3. Tax implications of subdividing the land into different lots.
4. Tax implications of selling seven lots to the buyers.
Theory:

3
TAXATION
 Section YA1 of the Income Tax Act 2007 (ITA 2007).
 Section YD1 of ITA 2007.
 Section CB 6 of ITA 2007.
 Section CB 13 of ITA 2007.
 Section EZ 48 of ITA 2007.
 Anzamco Ltd (in liq) v CIR (1983).
 Aubrey v C of IR (1984)6 NZTC 61,765.
 Morrow v CIR (1989)11NZTC 6,053.
Rules:
A conditional or unconditional agreement entered into by a person with the object of acquiring or
selling a property and is not an option or future contract is how an agreement for the sale or
purchase of property has been defined in EZ 48 of ITA 2007 (Calitz & Van Zyl, 2016).
Section CB 6 of the act explains amount received from disposal of land will be treated as income
for tax purpose of the recipient if the land was acquired for more than one purpose and one of the
purposes of acquisition of the land was to dispose it off in the future (San Juan, 2017).
Section CB 13 of ITA 2007 states that an amount derived from disposing off land will be treated
as income of the person receiving such amount under the section if the amount has not been
assessed as income under any of sections CB 6A to CB 12 as well as section CB 14. An amount
derived from a scheme or undertaking which is not exactly business will be considered as
income of the person under section CB 13 of the act (Saad, 2014).
Inland Revenue Department is the statutory department of New Zealand government
provided with necessary powers and rights to administer tax related matters in the country. Often

4
TAXATION
it is heard that there is no capital gain tax in New Zealand. Well it is not entirely true. The tax
laws in New Zealand ensure collection of taxes in different names using hidden laws on gains
from buying and selling of properties in the country (Mulligan, 2015). Thus, even if not called
capital gain tax but Inland Revenue Department (IRD) collects property investment tax on profit
and gains of sale of properties in the country.
The perception of IRD in relation to the transaction shall be the determinant factor in
ascertaining the liability to ITA 2007 in the country. In case if the perception of IRD is that a
person is trading in properties. Thus, earning profits and losses from buy and sale of profit would
be assessable as income from business from the property trading of such person. On the other
hand the investors with the intention of earning rent from properties or dividend from equity
investment, such incomes shall be assessed as taxable income and accordingly, taxed as per the
provisions of ITA 2007 (Exeter, Zhao, Crengle, Lee & Browne, 2017).
IRD while assessing the taxability of such transactions associated with properties in the country,
it considers the following factors to determine the nature of such transactions and assessable
income from such transaction to tax accordingly.
The intention of the seller at the time of buying the property:
If at the time of buying the property the objective behind the acquisition is to resale it then
irrespective of the number of properties of similar nature that the buyer had, the sale proceeds
from the sale of such property at the time of selling will be liable to capital gains tax in the
country (Cordery, 2018).
The period of holding:

5
TAXATION
The period of holding of a property before the sale of such property is an important factor in
determining the income tax liability on sale of such property. In case the property is held for less
than 2 years or 24 months before the date of sale then profit on sale of such property is
automatically taxed in the country (Johnston, 2017).
The transaction history of the tax payer in buying and selling:
In case a person has particular pattern that suggests historical transactions of similar characters
with properties buying and selling then the person would be regarded as a trader in property. In
such case the amount of profit and losses from buying and selling of such properties would be
taxed as business income and not as capital gain in the hands of the tax payer (Edeigba &
Amenkhienan, 2017).
Association with property industry or with a person who works in property industry:
In case the seller is associated with the property industry in his capacity as a property developer,
trader, and builder or is associated with any person who works in the property industry then the
gain on sale of properties within ten years will be taxed as capital gain in the hands of the seller.
Thus, the connection with the property industry is an important consideration in determining the
nature of income and subsequent tax liabilities on such income (Creedy & Eedrah, 2016).
In addition to the above IRD makes it compulsory for the tax payers to provide all
relevant details about the tax payers and the transactions effected by them in relation to the
particular properties and historic transactions. As already mentioned that the liability to pay tax
on sale of property is dependent on four key aspects, these are; intention of the tax payer at the
time of acquisition of the property, the history of buying and selling of properties of the tax
payer, seller’s association with the property industry and whether the asset was sold within 5