Taxing subdivided land
Question from Vivienne updated on 27th March 2020:
We have 40 acres of bare land which we purchased in 2005. We were going to build on it but have now moved out of the district. We understand that if we sell it as one block there will be no tax implications.
However, we have decided to subdivide the block into three 10 acre and two five-acre blocks. We will provide power to the sites, fencing and gravel driveways/entries.
We are not sure if this qualifies as minor or major work when it comes to subdivisions - but we are not property developers. We have struggled to find information about the tax implications of this in New Zealand.
Can you help with some answers before we go ahead with the subdivision? If we do have to pay tax on the profit minus the cost of the land - do you know what percentage it is? Happy with any information you can provide.
Our expert Mark Withers responded:
Section CB13 taxes gains from the disposal of land where that land has been the subject of a scheme of development or division that involves significant expenditure on earthworks, roading, drainage, etc. To be taxed under this section you must not be taxed under any of the other taxing provisions. This is because tax calculated under this section is based on the gain relative to the market value of the land before the scheme of division rather than the cost price of the land. So the capital gain you have enjoyed is not the focus of the taxing provision, rather the development profit from the subdivision is.
It’s wise to obtain a registered valuation before you begin to determine this new cost base for the tax calculation. The IRD has recently released a comprehensive guideline paper setting out what they consider to be " major expenditure", and they look at this as quantum overall and the relative cost compared to the asset value. The paper contains useful examples that help to put context to the matter.
However, the taxing provision applies regardless of whether you are property developers and regardless of how long you have owned the land. Tax on these sorts of projects would normally incur the top marginal rate of 33%. But be careful also of GST: the activity of dividing a block of land into five lots will almost certainly amount to a taxable activity for GST and that has a further 15% output tax payable on disposal.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.