When Is the Sale of Land Taxable?

The relevant provisions of the Income Tax Act 2007 that deal with land sales are CB 6A to CB23B and DB26 to DB28.

Land Acquired  for purpose or with the intention of disposal – Section CB 6

If, at the time the land was acquired, the purchaser intended on selling the land, any profits derived on sale will be taxable.  The key test of section CB 6 is the intention or purpose when the taxpayer acquired the land.

A purpose or intention of disposing of the land does not need to be the only purpose or intention you had when you acquired the land.  At also does not need to be your dominant or main purpose or intention. It is enough if disposal is one of your purposes or intentions.

Disposing of the land  has to be more than a vague idea, or just a possibility or option in the future. For the intention test to apply, the taxpayer is required to have a firm purpose or intention of disposing of the land.

A common example of this is where a farm is purchase that has more than one dwelling on it and the additional dwellings are surplus to requirements.  At the time of purchase, the purchase or  intention was to subdivide and sell off the surplus house and curtilage. In this case any profit derived on sale of the subdivided dwelling would be taxable, as it was purchased with the intention of selling it.

It is up to the taxpayer to show that they did not acquire the land with the intention or purpose of selling it.  This is a subjective test and it is common for Inland Revenue to request information from banks, real estate agents and other parties to ascertain evidence of the purchase or intention.  Be aware that any tax advice document we provide you is privileged information and as such you should contact us before disclosing any information to the Inland Revenue.

There is no time limit on this provision which means that applies regardless of how long the property has been owned

Subdivisions Where the Work Undertaken Is More Than Minor – Section CB 12

If a taxpayer carries on an undertaking or scheme involving the development or division of land into lots and that undertaking or scheme began within 10 years of acquisition of the land any profits derived on sale will be taxable if the development or division work is not minor.

Inland Revenue has recently issued interpretation statement IS20/08  Income Tax - When Is Development or Division Work "Minor"?

Inland Revenue has confirmed that whether development or division work is more than minor depends on an overall assessment of the facts of each case having regard to what has been done relative to both the nature and value of the land involved.

 The following factors must be considered:

My acid test is whether a spade has been placed in the ground moving dirt. By putting a spade in the ground there is likely to have been work of more than a minor nature undertaken.

Work of a minor nature can include drawing lines on a map moving the boundary or creating one.

Major Development or Division – Section CB 13

If a person carries on an undertaking or scheme involving the development or division of the land into lots and the development or division work involves significant expenditure, any profits derived from the sale will be taxable.

Section CB 13 (1) (iv) details what major development is as including significant expenditure on any of the following:

There is no time limit on this provision, which means that it applies regardless of how long the property has been owned.

In order to determine the amount of profit derived on sale,  a deduction is permitted under  section DB 27  for the value of the land immediately before the start of the undertaking or scheme.

Rezoning of land – Section CB 14

If a person disposes of land within 10 years of acquisition and at least 20% of the profit is derived from a factor such as rezoning, a consent granted, a decision of the environment court, removal of a condition or covenant or the like, any profit derived on sale will be taxable.

To determine the amount of profit derived on sale, a deduction is permitted under section DB 28,  which is calculated at 10% of the excess multiplied by the number of years the property was owned.  This deduction is in addition to the cost price of the property.

Associated to a Dealer or Developer – sections CB 9 and CB 10

If a person disposes of land within 10 years of acquisition and at the time of acquisition that person was associated with a land dealer or developer, any profit derived on sale would be taxable unless the residential land or business premises exclusion and sections CB 16 and CB 19, respectively, applies.

This does not apply to any land acquired prior to becoming associated to a land dealer or developer.

Associated to a Builder – Section CB 11

If a person disposes of land and within 10 years before the disposal the person completed improvements to the land and at the time the improvements began the person was associated to a builder, any profits derived on sale will be taxable unless the residential land or business premises exclusion and sections CB 16 and CB 19, respectively, applies.

This does not apply to any land acquired prior to becoming associated to a builder.

This is a short summary of the land taxing provisions which in themselves can be quite taxing.  For advice on your specific circumstance we recommend seeking professional taxation advice early.