Inland Revenue gives potentially misleading advice

Media Release

For immediate release                                                   1 December 2009

Inland Revenue gives potentially misleading advice on “off the plan” property sales

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 soldbeforea contract becomes unconditional orafterthe 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.

ENDS

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