When do you stop being an investor and start being a trader?
Our expert Mark Withers responded:
If ever there was a loaded property tax question this is it. It’s a bit like asking the barman whether you are still safe to drive after one more drink when you know you already have a few under your belt. First up, lets dispel a common myth. There is nothing in the income tax act that says you are okay to do one or two do up and sells before the gains become taxable. On the contrary. Section CB 6 taxes the gain made on any land transaction where the property is purchased with the purpose or intention to sell it at the time of acquisition. In the case of Morrow V CIR it was held that this does not need to even be the sole or dominant intention for the provision to tax. There is also no 10 year time limit on intent. If you purchased it with an intent to sell, its taxable regardless of how long you keep it.There is however an exclusion to this section dealing with a taxpayers own home. This is probably where the misconception lies in terms of one’s ability to climb the property ladder without being taxed. Be warned though, someone who develops a pattern of moving homes regularly and who is living off the proceeds of selling them on can still be taxed once a clear pattern of business activity emerges despite “living” in the properties. So, we have established that any single land transaction purchased with intent then sold for profit is enough to trigger tax on the gain, but is this sufficient to “taint” you as a trader under the associated persons rules? Arguably not. You see, the remaining taxing provisions dealing with taxpayers who deal in land, subdivide and develop land or erect buildings on land generally require the taxpayer to be “ In the business of ” these activities for the taxing provisions to apply. These are the sections that will “taint” you as a trader if your activities are sufficient to constitute a business. They are also likely to be sufficient to establish that your activities are “continuous and regular” which is the terminology used to define an activity that must then be GST registered. Being in the business of land dealing, development and building then generally sits alongside being GST registered for the activity. To be considered to be in the business of developing, dividing or dealing in land there needs to be a reasonable frequency of transactions or some continuity of effort with respect to the activity of buying, selling or exchanging land. So we can conclude that in layman’s terms the word “trader” probably defines someone who has sufficient continuity of activity to be considered to be in the business or dealing, dividing, developing or erecting buildings on land with some continuity of effort and activity.But even though you might not be a trader a single transaction done with intent will still be taxable, it may though not be sufficient to have you awarded “trader” status. Taxpayers should also be aware that there a couple of sections that can tax profits derived from the subdivision of land even if the land was not originally purchased with an intention to sell. These sections also have numerous tests and exclusions and again, being taxed on the gain from a one off subdivision does not necessarily mean one has established a business from the activity that would be sufficient to “taint” other activities. So there you have it. A thumb nail guide to the complex world of taxable land transactions and tainting via the associated persons rules. There is much to it and this commentary is far too brief to do full justice to a huge topic so as with all things tax, seek specific advice on your individual circumstances.If you’ve followed all that you’ve earned that extra drink now. Just don’t think you can still drive home.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.