The new tax rules concerning interest deductibility removal and the 10 year Brightline (for existing stock residential purchasers), combined with new planning rules allowing for significant intensification of large site properties, has many investors considering their options to develop land they might already own or even make a move to property development rather than sticking with investment.
Land held by a property development entity is said to be held on “Revenue account” for resale and as such, it becomes the stock in trade of any development entity.
Investment land is held on Capital account, where it is held for the purpose of deriving rental income rather than resale.
Whenever a developer sells revenue account land, there is tax payable on any profit derived regardless of where that property may sit on a Brightline timeline.
In section CB15, the income tax act contains an anti-avoidance provision designed to remove the motivation a developer may have to transfer land to associated parties at less than full saleable market value. This provision requires anybody associated to the developer acquiring revenue account land to be perpetually liable for income tax should that land be on sold at any time in the future regardless of whether the associate has acquired it on capital account or not.
This provision makes it difficult to effect tax efficient structuring arrangements if the developer’s agenda is to keep some of the revenue account property as investments and sell some down for profit.
There are some strategies to mitigate this but careful planning is required right at the outset with the opportunity to manage these issues lost if settlement has already occurred before the matters are considered.
Most developments involving the subdivision of land into lots and or the construction of dwellings for resale will constitute a taxable activity for GST.
If both buyer and seller are GST registered and the buyer gives an undertaking that they will be using the land in their taxable development activity and won’t be living at the property the transaction must be dealt with on a zero-rated basis, ie the vendor does not pay and the purchaser does not claim.
It is only property acquired from non-associated unregistered parties for use in a taxable activity that now gives rise to a GST second hand good claim.
As always, do your homework and take tax and GST advice prior to committing yourself.
If you would like to talk this over for your particular situation get in touch with Frans