Question from Kevin updated on 24th December 2018:
I am looking at subdividing my central Auckland property into either two or three lots. It currently has an older house on site that I have owned and lived in for the past 16 years. This house would be removed and two or three townhouses built.
I would live in one and sell the other one or two. What would be the tax consequences of this development - if any? Would there be different tax consequences depending on whether it is two or three houses being built?
Our expert Mark Withers responded:
Firstly, CB12 and CB13 typically tax gains on subdividing property where there is work of more than a minor nature. CB12 taxes apply where the work is undertaken within 10 years of acquisition but CB 13 has no time limit. But CB13 only applies where there is "major expenditure on earthworks and roading".
There are exemptions where the subdivision is the division of a taxpayers own home or if the division is for the purpose of enabling the taxpayer to live on the land. Note you should seek advice if the home is currently in a Trust because this can impact the exemptions. There are also separate sections that can tax the development for profit element you are contemplating.
My suggestion is to separate the two activities – ie: complete the subdivision and then sell the development sites to a company. The gain you make on the sections may be tax exempt but the gain the company makes on the development will be subject to tax and GST. This way you at least preserve the potential capital nature of the land division profit. Also, then focus on whether the building development is in fact profitable or was the gain simply in the land division.
You may need to enter a partitioning agreement to separate the legal ownership of the lots to be transferred to the company from the lot you intend retaining. You don't ever want to be in a situation where you are buying your own lot back off the development entity. The partitioning agreement creates legal separation prior to the separate titles emerging.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.