“Off-the-Plan” gains liable for tax

Investors are generally unaware of the tax implications of a property that is bought and sold “off the plan”, or when a development is still at the planning stage and no legal title has been issued.

Inland Revenue Department (IRD) issued a leaflet in November 2009, highlighting the rules applicable in such cases.

Many investors buy a property during the development or construction stage by paying a small amount of deposit but sell it before completion.

According to the IRD, such transactions will be treated as a normal sale and purchase of property and any gain will be taxable as business profit and not treated as a capital gain exempt from tax. There could however be exceptions.

Some investors erroneously believe that they need not declare profits made on property deals that are not settled and whose names do not appear on the certificate of title.

IRD will treat such transactions as taxable, as the intent of the taxpayer is to resell and make a profit. The determining factor would be the intention at the time of buying the property, with such intention determined when the agreement becomes unconditional.

IRD will also presume that intention was to resell, if the property is sold by the intending buyer before the agreement becomes unconditional. The Department’s officials believe that the contract could have been cancelled instead of selling the property.

Two Examples

The following examples should help clarify the issue.

Jeff Smith (does not refer to any real person) is an enterprising and young university student. He listens to a radio advertisement offering off-the-plan homes in a new subdivision for just $1000 deposit. Recognising that the property values in the area are rising, Jeff decides to use some of his university funds to buy a $290,000 home. He pays the deposit with the balance due on settlement.

The property value escalates during the following year and Jeff decides to sell his interest in the property to another buyer for $350,000. The profit ($60,000) that he made on this deal is taxable income and should be included in his tax return.

In this case, because Jeff always intended to sell the property, the profit will be taxable regardless of whether the property title has been issued or not.

Rebekah Thorn (does not refer to any real person) purchases a property from the same developer as Jeff. Her original intention was to live in the home after completion. However, before the property agreement becomes unconditional, she decides to “on-sell” her interest in the property for $320,000. Since the sale occurred before the contract went unconditional, the profit ($30,000) is taxable income.

IRD deemed wrong

Many Chartered Accountants feel that IRD’s advice on this issue is incorrect and misleading. The New Zealand Institute of Chartered Accountants Tax Director Craig Macalister supports this view, citing another example.

“John and Sue contracted to acquire land for a retirement home in Wanaka in an area yet to be subdivided. The contract is conditional on Resource Management Act approval and the title for the land becoming available. Unfortunately, Sue passes away before they take possession of the property. John decides not to purchase the land and instructs his solicitor to sell it, realising a gain of $50,000. As per IRD’s interpretation, this transaction is a taxable transaction.

“If such transactions are treated as taxable, it would then be against the intent of the lawmakers and IRD would be stretching it too far to tax such private transactions.

“IRD’s perception and interpretation are not based on the settled law with regard to land tax rules and is contrary to the policy intent of Parliament.”

Based on the IRD’s interpretation, taxpayers would be paying tax on sales where they are not required to pay the tax under the law. I recommend investors to take proper professional advice.

Vijay Talekar is a Director of Tax Experts Limited, Chartered Accountants (www.taxexperts.co.nz). The above article should be considered only as a guideline and  not as a specific advice. Mr Talekar absolves himself, the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise in this connection. Readers should seek professional advice before acting upon any information contained above.