Question from Dan updated on 31st July 2019:
We have owned an Auckland property in a buy and hold Trust since 2013. Under the Unitary Plan, the property is now in a Mixed Housing Urban zone so we can build six units on it. I would like to build six units, then sell four and keep two as long term buy and hold properties.
Can you please advise what would be the best way to structure this transaction to minimise tax implications on the ones we sell as well as the long term buy and hold properties? Please note that I have also had a GST registered Trading Trust since 2007.
Our expert Matthew Gilligan responded:
Thank you, Dan, for your question. I am going to have to say at the outset that it is not possible to give you a definitive answer here to what is not only a complex question, but one that would require me to know more about your current circumstances in order to be able to give you appropriate advice. For example, I would want to know what the tax circumstances of other entities and individuals within your structure are. Are there tax losses in trusts or companies? Are there beneficiaries who are subject to lower marginal tax rates or have tax losses?
But what I can say in general terms is that if you develop your property as proposed with four units being sold, there will be GST and income tax implications in relation to those four units. The construction and sale of four units is highly likely to be classed as what is known as a “taxable activity” from a GST perspective. This means GST would apply to the sales. You will be able to claim GST on costs incurred in constructing the four units for sale. You will need to be careful about how you go about getting a claim for the GST component of the original purchase of the land.
In particular, you will need to be very cautious about any proposal to transfer the property (or part of it) to your GST registered Trading Trust. Transfers between associated persons in the context of GST can have hooks. As far as income tax is concerned, you again are likely to have income tax applicable to gains on future sale of the four units developed to sell.
If your Trading Trust is in the business of trading property it may well be that the property is tainted, meaning any sale within 10 years of acquisition is taxable. This tainting period could even extend to 10 years from completion of building and could apply not only to the properties you intend to sell, but those you intend to hold. This again is where more knowledge of your circumstances is required. I will leave matters here, as that is all I can say from a broad standpoint. I strongly recommend you seek specific advice.
Matthew heads GRA's specialist property and asset planning division. He helps clients create optimal tax structures and build wealth through property. He has an extensive buy-to-hold property portfolio, is currently involved in over a dozen developments, and is author of two books - Property 101 and Tax Structures 101.