Property tax advice from IRD may be misleading, says accountant body

A brochure released this week by the Inland Revenue Department on property tax contains potentially misleading advice, the New Zealand Institute of Chartered Accountants (NZICA) has said.

The IRD brochure was released to provide tax information for when a property is bought and sold "off the plan", or when a development is still at the planning stage and yet to be constructed and no legal title has yet been issued.

The IRD said there was a common misconception by people that buying and selling properties off-the-plan before legal title was issued meant there was no need to declare the sales.

However, IRD said that when off-the-plan property is purchased with the intent of resale, the profit is considered taxable and any loss would be deductible.

Even in a case when an off-the-plan property was first purchased with no intent of re-sale, but then a change of situation for the buyer meant the property had to be sold, the IRD said it would presume an intention of re-sale. This was because the contract could have been cancelled instead of re-selling, the IRD said.

But NZICA tax director Craig Macalister said they had received complaints from chartered accountants as to the correctness of the brochure.

"This brochure states Inland Revenue will presume an intention of sale for all property sold prior to a contract going unconditional," Macalister said.

"It is saying that if a person made a deposit on a property with the intention to live in that property, but subsequently had a change of circumstances and decided to sell it before the contract went unconditional, then any gain made on that transaction would be taxable."

"For example, John and Sue contracted to acquire land for a retirement home in Wanaka that is in an area yet to be subdivided. The contract is conditional on Resource Management Act approval and the title for the land becoming available.

Unfortunately, Sue passes away before they take possession of the property. John decides not purchase the land, and instructs his solicitor to sell it. The sale realises a gain of $50,000. Under Inland Revenue's interpretation this transaction - although of an inherently private nature - is a taxable transaction."

"(T)he Institute (is) concerned that it is unlikely Parliament ever intended such transactions to be taxable. Furthermore the Inland Revenue view is not based on settled law. Rather, it is a fine point of law that has been pursued by Inland Revenue in some recent cases."

"The brochure is also confusing in whether it is always referring to property sold before a contract becomes unconditional or after the contract becomes unconditional - different outcomes can arise in these circumstances."

"We support Inland Revenue following up on land transactions that were undertaken for the purposes of making a gain and we support Inland Revenue in its efforts to inform people of their obligations in those circumstances."

"However, trying to encourage people with inherently private transactions to pay tax on any gain (when property is purchased off a plan and before possession is taken) is taking matters a little too far. This is especially so when we are not dealing with settled law, and when it would seem contrary to the policy underpinning the land tax rules."

"The public needs to be aware that the advice contained in the Inland Revenue brochure (IR 368) should not be taken at face value. We strongly endorse the recommendation in the brochure that people should obtain tax advice from a professional."