A rule that taxes gains on the sale of land that are attributable to council zoning changes may assume far greater significance following the release of the Proposed Auckland Unitary Plan (Unitary Plan).
Land which becomes significantly more valuable if proposed zoning changes are adopted could be subject to a tax on the gain in value from rezoning, if the land is sold within 10 years of purchase and does not fall within some narrow exceptions.
The recommendations on the Unitary Plan were released to the public on 27 July. A significant theme of the Unitary Plan is the rezoning of existing strategic urban areas to accommodate intensification and development. The potential for the proposals to significantly increase the value of land that has been zoned for intensification has since been the subject of much media comment – but the possibility of some property owners materially benefiting from zoning changes also throws a spotlight on the potential for such gains to be taxed.
A summary of the key recommendations on the Unitary Plan can be found here.
When are rezoned land sales subject to tax?
The “land provisions” in the Income Tax Act 2007 subject certain land sales to income tax.
These provisions apply (subject to certain exclusions) in various well known circumstances, including where the land that is sold was acquired with the purpose or intention of resale, was acquired for the purposes of a business relating to land, or is disposed of within two years of acquisition.
The land provisions also include a lesser-known rule taxing gains made from the disposal of “land affected by change”. This rule provides that a gain on the sale of land is taxable where:
- the person disposed of the land within 10 years of acquisition, and
- at least 20 per cent of that gain was attributable to one of a number of factors relating to the land, occurring after the acquisition of the land by the person. Significantly, the identified factors include gains attributable to a change, or a likely change, to the rules of an operative district plan under the Resource Management Act 1991 – which the Unitary Plan would amount to once implemented.
In short, the rule could apply where a person sells land within 10 years of acquiring it and 20 per cent or more of the gain they realise is attributable to a change in zoning set out in the Unitary Plan.
Exclusions to the rule
This rule is subject to exclusions for sales of residential land and farm land. In the case of residential land, the rule does not apply where the person selling the land acquired and used it (or at least intended to use it) for “residential purposes”, and sold the land to another person who has also acquired the land for residential purposes. The term “residential purposes” means the use of the land mainly as a residence for the person acquiring the land and members of their family.
The sale of a home by a person to a land developer would not fall within this exclusion. The exclusion would also not apply to investment properties.
Some relief – a deemed deduction
Where the rule applies, the person has a deemed deduction equal to 10 per cent of their gain for each year they held the land. For example, if a $100,000 gain was made on the sale of land held for four years and that gain was taxable under this rule, then a $40,000 deemed deduction would be available so that tax was payable on only $60,000.
Potential for broad application of this provision in respect of land rezoned under the Unitary Plan
We do not believe this rule has been heavily relied upon by the Inland Revenue Department since the introduction of its predecessor provision in 1975. It has only been the subject of a relatively small number of cases since then.
The introduction of the Unitary Plan could allow for an unprecedented level of urban intensification, which may result in a significant increase in the number of taxpayers potentially subject to this rule.
It is unlikely that an event like the release of the Unitary Plan would have been contemplated when the rule was introduced, the legislature possibly having in mind windfall gains made by land owners on the urban/rural boundary that derive from zoning changes. Given the potential consequences of this rule, there is a strong case for a review of its scope to ensure it operates appropriately having regard to current tax policy settings.
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.