IRD – Whether a subdivision was subject to income tax and GST

In November 2022 Inland Revenue issued TDS 22/21, a Technical Decision Summary on whether the profit from a subdivision was subject to income tax and GST.

TDS 22/21 covered a dispute involving a subdivision by the taxpayer of land into two lots. The taxpayer had acquired the property for the purpose of renovating and expanding it to live in with extended family. The taxpayer and extended family moved in, but after commencing renovation plans found that the existing dwelling had serious issues with drainage and asbestos.

As a result, the taxpayer decided to demolish the existing dwelling, subdivide the land into two lots and construct two new dwellings (‘House A’ and ‘House B’). While the subdivision took place the family moved into a rental and subsequently moved into ‘House A’ when it was constructed.  ‘House B’ was sold shortly after construction to a third party.

When determining whether a gain on disposal of land is subject to income tax, various land taxing provisions must be considered. If the taxing provisions don’t apply, or a specific exclusion to a taxing provision applies, then the gain should not be taxable.

Inland Revenue’s Customer & Compliance Services (CCS) team took the view that the following sections applied to tax the gain on sale of House B:

  • The taxpayer entered into an undertaking or scheme for the dominate purpose of making a profit (section CB 3).
  • The taxpayer acquired the property for a purpose or with an intention of disposing it (section CB 6).
  • The disposal was a more than minor scheme for development or division begun within 10 years of acquisition (section CB 12) and the residential land exclusion (section CB 17) did not apply.

The CCS team also argued that a taxable activity was carried out and the sale should be subject to GST.

The Tax Council Office (TCO) disagreed with these assertions, predominately due to the taxpayer’s intentions at the time of acquiring the property. As the property was acquired for the sole purpose of housing the taxpayer and their family members, the taxpayer had no intention of disposing of the property or making a profit at the time of acquisition and therefore both sections CB 3 and CB 6 did not apply.

Given the land was occupied mainly as residential land by the taxpayer and their family members before it was subdivided, the TCO found that the residential exclusion under section CB 17 was available to exclude CB 12 from applying. There was specific contention on the application of this exclusion, but it was noted that the exclusion is based on the taxpayer’s intended use of the land, and that, under this exclusion, there is no requirement for the taxpayer to reside on the land for more than 50% of the time of ownership – it is not a time-based test.

The TCO also found that the sale was not subject to GST on the basis that it was a ‘one-off’ activity, and did not constitute a ‘continuous or regular’ activity – one of the requirements to be subject to GST.

In this case we are left with the question, why did Inland Revenue enter into a dispute with the taxpayers at all? Based on the facts of the case it appears clear that neither income tax nor GST should apply. However, it’s good to see that the Tax Counsel Office, which itself is part of Inland Revenue, and made the decision, got to the right answer in the end.

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