The IRD has released draft guidance on the "business premises" exclusion in the land tax rules, concluding that business premises are limited to buildings only and adopting a surprisingly narrow view of when land is "reserved with" the business premises.
The "business premises" exclusion applies to sales of land that would otherwise be subject to tax under the land tax rules. The IRD has recently published a draft document detailing its view on the scope of the exclusion. The IRD is open for comment on its guidance before 7 June.
What are business "premises"?
The IRD's view is that "business premises" means "a building together with associated land from which a business is carried on". This leads the IRD to say that for land to be business premises there must be a building of some sort on the land.
To demonstrate what that means, the IRD paper refers to the example of a scrapmetal merchant that buys a bare piece of land with the intention of resale. The merchant establishes a scrapmetal yard on the land and, six years later, sells the land at a healthy profit. Somewhat surprisingly, the IRD concludes that the business premises exclusion would not apply to the sale because there is no building on the land.
Based on the example provided by the IRD, it appears that a business operating from an office in a caravan would be prevented from accessing the exclusion, but could bring itself within the terms of the exclusion by constructing a (sufficiently sturdy) shed. This is potentially an arbitrary distinction that does not reflect the different ways in which businesses is conducted.
The premises must be "mainly" for the business
Assuming that the land has a building on it, a further requirement is that the premises must have been acquired (or built) and occupied by the landowner "mainly to carry on the business from them". The IRD takes this to mean that the business use must be the main purpose for the premises, in the sense of outweighing all the other purposes, both singly and collectively.
Where land is used for multiple purposes, it may be possible to apportion the land between premises that are used mainly for the purposes of a business and land that is used for another purpose (for example, a building comprising a downstairs retail space and flat upstairs). In this case the business premises exclusion can apply to the portion of the sale price attributable to the business premises component but not the other components.
Extension to land reserved for the business
The business premises exclusion also extends to land that is:
reserved, with the premises, for the use of the business; and
is of an area no greater than that required for the reasonable occupation of the premises and the carrying on of the business.
The IRD adopts a strict interpretation of the words "reserved, with the premises" in its draft guidance. In the IRD's view, this requirement will be met if, and only if, the land in question:
is part of, or immediately adjoining, the business premises; and
is kept solely for the use of the business carried on from the business premises.
On this interpretation, a client carpark immediately adjoining the business premises may qualify, but a client carpark located further down the street would not (because it is not part of the business premises or immediately adjoining). There is a real question as to whether this narrow view is appropriate and reflective of the policy underpinning the business premises exclusion.
Regular pattern of buying and selling business premises
Significantly, the business premises exclusion does not apply to a person who has engaged in a regular pattern of buying (or building) and selling business premises. The IRD notes that whether a landowner has a regular pattern of this activity will be a question of fact and degree, depending on the number of similar transactions and the intervals of time between them. However, the IRD does offer the view that at least three prior transactions involving business premises would be required before a regular pattern of activity could be potentially established.
Greater focus on land sales by businesses?
With the Government abandoning its capital gains tax proposal, enforcement of the existing land tax rules may become a focus of the IRD. It is unclear whether the release of the IRD's draft guidance is part of a broader strategy to target business premises transactions.
Unless the IRD softens its current view, taxpayers will need to be careful when disposing of land held as part of their business in light of the narrow approach currently put forward by the IRD, particularly for mixed use land, land with no buildings and accessory land that is not immediately adjacent to business premises.
If you or your business would like further information or advice in relation to the business
premises tax exemption, please contact the authors or your usual Bell Gully advisor.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.