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Inland Revenue

Tax Policy

Application to land provisions


(11 – M Scott, 15 – WHK Taylors, 32 – KPMG, 39 – Russell McVeagh, 47 – Grant Thornton, 53 – Ernst & Young, 57 – Tomlinson Paull, 58 – nsaTax, 61 – Trustee Corporation Association of New Zealand, 62 – Minter Ellison Rudd Watts, 67 – New Zealand Institute of Chartered Accountants, 68A – Corporate Taxpayers Group, 70 – Deloitte)

The integrity of the tax system is at risk because of the arbitrary and unfair nature of the taxation of certain land transactions, even more so under the proposals in the bill relating to associated persons. Therefore, the associated persons rules in the land provisions in sections CB 9 to CB 11 should be repealed.

Land should be capable of being held on capital account if that is the taxpayer’s purpose. There does not seem to be any policy reason why taxpayers should not structure their land holdings to clearly differentiate between property held for indefinite or long-term rental purposes and property held on revenue account.

The current exclusions in the land provisions such as those for residential land, business premises and investment land should be extended.

The land provisions require extensive amendments to remove inconsistencies and make them more coherent. For example, Section CB 10, which relates to land development or subdivision businesses, is redundant because of section CB 12 (schemes for development or division begun within 10 years), and should be repealed.

The Valabh Committee proposed a rebuttal nomination scheme which would have allowed taxpayers to specify the purpose of a land acquisition and be taxed accordingly. This is a better policy approach than what is proposed in the bill.

It seems timely to question whether the 35 year-old policy in relation to real property is still good policy today. The wider policy aspects of the land tax rules should be reviewed contemporaneously with the review of the associated persons rules.

Parliament should reconsider whether the so-called “10-year sale rule” in the taxation of land provisions is appropriate at all, or whether it should be modified in some way.

The introduction of a wide associated persons test to land transactions is an inappropriate way to target base maintenance concerns and the application of the proposed associated persons rules to land transactions should be more carefully targeted to situations where there is an actual threat to the tax base.

Essentially, the law should provide a mechanism that allows persons associated with property developers to hold property on capital account, if in fact it is held on capital account.


Officials note that when Parliament enacted the current land sale tax rules in 1973, it expressly provided that land dealers, developers and builders could not generally hold land on capital account. This means that all gains on properties sold by property developers within 10 years of acquisition are taxed in most cases.

Parliament’s intent to strengthen the tax provisions relating to land sale gains and, in particular, restrict the ability of land dealers, developers and builders to hold land on capital account, is clear from the parliamentary debates.

The land sale tax rules are buttressed by associated persons rules that are designed to prevent land dealers, developers and builders escaping tax if they structure the ownership of their investment properties through an associate.

This legislative policy can currently be circumvented by some relatively simple structures. For example, a property developer can arrange for a trust, settled by that developer and under which the developer is a beneficiary, to acquire land. The property developer is not, under the current associated persons rules, associated with the trust, so the trust is not taxed on any subsequent sale of the land within 10 years of acquisition.

It is unlikely that Parliament intended that the current legislative policy on land sale gains – which is that land dealers, developers and builders should generally be taxed on all their land sales and cannot claim to hold non-taxable investment portfolios – could be circumvented by such structures. The changes in the bill would mean that this legislative policy is better achieved by closing some gaps in the current law.

It is not envisaged that the current legislative policy on land sale gains will be narrowed.

Officials note a considerable number of modifications have been made to the associated persons tests for the purposes of the land provisions so they cover situations under the effective control of property dealers, developers and builders, but do not apply to other situations.

A number of submissions have also suggested extensive amendments to various aspects of the land provisions such as the exclusions for residential land and business premises, and how transactions between associated persons are treated. These submissions are outside the scope of the associated persons reforms which are primarily concerned with defining when persons are associated with each other.

The Valabh Committee proposal involving a nomination scheme has not been proceeded with mainly because of the large compliance and administration costs that such a proposal would entail.


That the submissions be declined.