Land dealers, developers and builders who wish to hold investment properties as well as the properties they are dealing, developing or building are in for a much tougher regime from tomorrow. The new Associated Persons rules applying to land transactions are likely to be enacted by parliament tomorrow, which will be the first major revamp in the 36 years since they were first introduced.
The intent of the new rules is that land dealers, developers and builders will not be able to also purchase land as an investment without being subject to tax on the increases in its value.
To be fair, that was also the intent of the original rules enacted back in 1973 – it’s just that the old rules had enough loopholes to drive a bus through. And advisors made very good use of those loopholes to ensure that land dealers, developers and builders could structure their affairs to conduct their development activities on the one hand – and to also purchase and hold investment properties without being subject to tax on the capital gains on the other hand.
The new bill makes its intent crystal clear, and is well drafted to achieve its objectives.
Anyone associated with a land dealer, developer or builder will now likely find themselves with a tax liability on increases in the value of investment properties purchased after this bill becomes law.
There are a number of possible strategies for managing these issues, but they are nowhere near as straight forward as they have been in the past – and there are unlikely to be “off the shelf” structure solutions promoted by tax advisors.
Management will likely fall into one of these general categories:
Divestment of Control of investment properties to adult relatives who are not spouses. This will be easier said than done, as there are provisions to ensure this is a genuine divestment and that others are not simply acting as nominees.
Management of Timing of Development Activities. There is likely to be much more attention paid to exactly when a person starts and ceases to be a dealer or developer. Projects typically have a definite start and finish date – and development companies may be liquidated promptly on completion of projects opening a window for property investment by those involved before the next development project is commenced in a fresh company.
The Ten Year Rule. Investment properties purchased by developers, dealers and builders are likely to fall out of the tax net if they are held for ten years or more. This rule remains unchanged from the current provisions, but we are likely to see much more attention paid to this as other easier options for separation of development and investment properties are no longer a possibility.
Exemptions for Family Homes and Business Premises. Of course one must not establish a pattern of buying and selling family homes or business premises, but this exemption will remain. We may see some keen interest by developers, dealers and builders in buying industrial investment properties suitable for occupation by their businesses in order to take advantage of the business premises exemptions.
So expect to see this new legislation passed – if not tomorrow, then very soon afterwards. It is a fait accompli, and its passage through parliament will probably hardly even hit the press. But its implications are significant for those involved.
Please note this blog post is a general discussion only, and is not intended to be relied upon as tax advice. Each case is specific, so please talk to Elevate CA or your existing advisor for specific tax advice.
Fraser Hurrell is one of three directors of Elevate CA Limited, Chartered Accountants & Business Advisors in Whangarei, New Zealand.
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