Having hooked information on a taxable land deal, Inland Revenue will move in to collect the core tax due, shortfall penalties (between 20% to 40%) and use of money interest (currently 9.89%). These additional charges sometimes double the amount due to Inland Revenue. 

Outlined below are examples of land deals that will likely trigger Inland Revenue’s interest.  

The “forever home” – a history of deals

Some people buy or build their “forever home” only to on-sell after three years and repeat that exercise multiple times. Urban myth has it that these transactions are not taxable because each home is a residence for the person and their family. In reality, Inland Revenue readily identify and tax these transactions.

For example: Fred and Jordan live together and have just sold another “do-up” family home. The AI identifies that Fred and Jordan have bought and sold four family homes over a six-year period (sometimes in Fred’s name, sometimes in Jordan’s name and sometimes in a related entity’s name). Fred and Jordan claim the family home exclusion applies and the sale proceeds are not taxable.

Outcome: Inland Revenue points out that the residential exclusion does not apply if Fred and Jordan have a regular pattern of such transactions. Inland Revenue assesses the core tax on the above deals, (say, income tax of $250,000, plus shortfall penalties of 20% on the core tax due, say $50,000, plus Use of Money Interest over multiple years at 9.89%, say, $70,000). (Note bright-line taxation may also be relevant – see below).

Bright-line taxation

Residential properties sold from 1 July 2024 onwards only incur bright-line tax if sold within two years of purchase (although there are exemptions). Prior to that date, bright-line taxation applied when a residential property was sold within the relevant five or 10 year bright-line period (again, there were exemptions).

Example: Jimmy purchased a rental property (not a new build) on 31 March 2020 and sold it on 31 March 2024. Inland Revenue’s AI has automatically identified the sale, it knows that the five year bright-line rule applied to a property purchased on 31 March 2020, and it concludes that the sale occurred within five years and the sale is taxable. It will then identify whether the taxable profit on the sale was included in the relevant tax return, which may not be filed until one or two years after the property sale. Inland Revenue will apply taxes in a similar way to that described in the example above.

Development and division of land within 10 years of purchase

This tax fishhook can catch you unawares. It applies when a person buys land and develops or divides it within 10 years of purchase. A subsequent sale of that land at any time will be taxable, (unless an exclusion applies). For these purposes, “development and division” includes fencing, installing power, acquiring engineering plans and/or obtaining resource consent – unless the work done is minor.

Example: In 2020, Freda's marketing agency had a very successful year, prompting her to purchase a block of land as an investment. By 2024, economic conditions had become challenging, leading Freda to subdivide the land to facilitate a potential sale if required. Ultimately, Freda did not need to sell any of the land, but let’s say she ultimately sells one lot in 2026 and the other in 2030.

Outcome: Freda’s land sales are taxable whenever the land is sold. This is because a development or division occurred within 10 years of purchase (assuming the work was more than minor). The AI would identify the land sale and match her purchase date with data relating to the subdivision. The profit on sale (including a substantial amount of inflation gain) would be taxable unless an exclusion applied, which is unlikely in this case. 

Transfers to associates – a cunning tax plan?

Special land taxing rules apply to land transferred between associated parties and Inland Revenue’s systems can spot transfers between associates.

Example: Emma develops six units for sale and pays tax on those sales. She has a cunning plan; and sells the seventh unit to the Emma Trust at cost (that is, she makes no profit and therefore pays no tax on the seventh sale). Some years later, the Emma Trust sells that unit to a third party for a significant capital gain.

Inland Revenue’s AI spots the seventh sale and recognises that Emma and the Emma Trust are associated and assesses each of them on the following basis: 

• First seventh unit sale: Emma’s sale to the Emma Trust is deemed to occur at market value (assumed to be higher than cost) and Emma is accordingly assessed for core tax, and likely shortfall penalties and UOMI. 

• Second seventh unit sale: The sale by Emma’s Trust to the third person is assessed as taxable (again applying the original associated person rule above) with penalties and UOMI likely added.

GST on land transactions

As a reminder, a person selling land is liable to account to Inland Revenue for GST on that sale if it is part of their GST taxable activity (or deemed by Inland Revenue to be part of a land sale activity).

Example: Frank and Freda’s children have left home so they subdivide their lifestyle property into four additional lots, including some development work. Inland Revenue are likely to treat the sale of the additional lots as subject to GST (and consider any income tax issues).

Land tax implications: Forewarned is forearmed

There is no Capital Gains Tax in New Zealand but there is a very complex land taxation regime riddled with fishhooks and occasional exemptions. Combined with this, Inland Revenue’s new systems are very good at identifying possible taxable land transactions. This means: 

• Before purchasing land be clear about the tax consequences of your ownership structure, the consequences of various types of development and division, and the exemptions you may (or may not be able to utilise). Forewarned is forearmed. 

• Alternatively, if you have sold land and are concerned about potential tax issues, or have received a “please explain” letter from Inland Revenue, a voluntary disclosure (we can help with this) can be a useful tool to at least cut down your potential penalty exposure.

If you have concerns about proposed or past land transactions, contact your Baker Tilly Staples Rodway tax advisor. Our team is is having good success negotiating substantial reductions in tax penalties that can otherwise apply to unpaid taxes including unpaid taxes for past land deals. As always, more generous penalty reductions are available if you identify and disclose the unpaid taxes before Inland Revenue taps you on the shoulder.  

Baker Tilly Staples Rodway is a co-author of the CCH Learning NZ book, "A Practical Guide to Taxing Property Transactions".