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. "(T)he Institute (is) concerned that it is unlikely Parliament ever intended such transactions to be taxable," Macalister said. "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," he said. "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." Here are IRD's comments from the brochure (we cannot at the moment reproduce the brochure via scribd because government departments have a habit of locking their pdfs):
In some cases a property can be sold a number of times before any improvements or building construction has been completed, and often before legal title to the property has been issued. Even though off-the-plan property does not yet exist, strictly speaking, it is bought and sold and has a value. That value can rise and fall, the same as existing property does. Some people have been buying and selling property off the plan in a somewhat similar way to how futures options are traded on the share market. With few exceptions, these sorts of transactions are taxable in the same way as other property transactions. It's widely accepted that the practice of buying and selling properties before legal title is issued occurs in most developments. Some people mistakenly believe that because their names do not appear on titles there is no need to declare these sales. "Inland revenue routinely collects and monitors national off-the-plan sales information and we've noticed an increase in the number of sales not being returned." Like other property, when an off-the-plan property is purchased with the intent of resale, the profit is considered taxable and any loss would be deductible. Inland revenue considers that when off-the-plan properties are sold prior to taking possession of the property, the sale is most likely taxable. Your intention when a property is purchased is the determining factor in working out if it is taxable. Your intent is determined at the time the contract to purchase the property becomes unconditional. With interests in property sold prior to a contract becoming unconditional, we will presume an intention of sale. This is because even though other circumstances may have prompted the sale, the contract could have been cancelled instead of selling the property. However, working out exactly when a contract became unconditional can be complex and we strongly suggest you consult a tax professional.NZICA tax director Craig Macalister gave this response:
The New Zealand Institute of Chartered Accountants' tax director, Craig Macalister, said an Inland Revenue brochure (IR 368) issued yesterday on the taxation implications of property sales made "off the plan" contains potentially misleading advice. "This brochure states Inland Revenue will presume an intention of sale for all property sold prior to a contract going unconditional. 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", said Mr Macalister. 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. Mr Macalister said the Institute was 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, said Mr Macalister, 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 have received complaints from chartered accountants in public practice as to the correctness of the brochure." "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," said Mr Macalister.
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