There is a popular belief that property transactions are tax-free because New Zealand does not have Capital Gains Tax.
This is not true.
Property trading and speculation are taxable.
Inland Revenue Department (IRD) has been cracking down on people who have not declared profits made from property transactions.
Revenue Minister Todd McClay recently said, “It is a really clear and simple message to those who want to buy and sell property with the intention of making a profit that they have a tax obligation as any other New Zealander does.”
In our experience, IRD takes a hard line view on property dealers who do not declare the income earned from property transactions.
IRD alert
The Department constantly reviews all property transactions, focusing on property speculators and dealers who have either not declared income from their transactions, have treated income as capital gains or have not filed tax returns. Taxpayers who have not complied with the rules are being investigated, and are placed on alert on any future transactions that they make.
IRD uses a targeted audit system to alert property transactions by taxpayers who continue to be non-compliant. This system monitors a significant number of properties for future activity.
An internal notification prompt system enables IRD to act much earlier if there is a need, and in some instances before a taxpayer takes a position relating to tax. It enables IRD to identify instances of traded properties with masked ownership to evade tax.
Serious offence
Evasion is a serious offence and IRD can prosecute offenders.
Three main factors determine your tax status on property transactions. They are (a) your intention when you buy a property (b) the patterns of your previous property transactions and (c) your association to a builder, property dealer or developer.
If you are a speculator and your intention at the time of purchase was for resale, then any profits made on the sale will be taxable. Speculating can be a one-off purchase and/or sale of property. Receiving rental income from the property does not automatically rule you out as a speculator.
The parametres
You are deemed as a property dealer or trader if you have established a pattern of buying and selling properties. There is no set number of properties that you can own before they become taxable. In some cases, the first property bought and sold may be taxable if you bought it for resale. In other cases, there could be a number of factors to take into consideration, such as having a regular pattern of buying and selling property, before a property is taxable.
You can be deemed as a property dealer if you are associated with other property dealers.
The persons you can be associated include your family members or if you are connected with property companies, partnerships or trusts that are engaged in property activities
This association may make you a property dealer and will impact any property transaction that you undertake, including owning a rental property.
Complex rules
The ‘associated person rules’ are complex and must be carefully reviewed before engaging in any property transactions to avoid being tarnished or tarnishing others as a property dealer.
If you do not have a history as a property dealer, and if you buy a property with the intention of generating ongoing rental income with no firm intent of resale, then you would not be considered as a property dealer.
In such cases, when you sell the property later for a profit, the profits are likely to be deemed ‘capital profits’ and would not be taxable.
If you are involved in or are planning to get involved in a property transaction or planning to be involved, and you are uncertain of your tax obligations, please contact us. We will be able to advice on the tax implications and assist with resolving any tax issues.
Daran Nair is Director of Nair & Chen Associates Chartered Accountants, joint sponsor (with Corban Revell Lawyers) of the ‘Business Excellence in Innovation’ category of the Indian Newslink Indian Business Awards 2014. Mr Nair can be reached on Phone (09) 5225182; Fax (09) 5225183; Email: daran@nair.co.nz
