Aaron asks the question:
Speaking of IRD assessments, I’d love to know your view as a former IRD officer how assessments are considered.
In particular, I was thinking about how the IRD have stated that they will be looking at property speculators and developers over the last few years, particularly those who have been in the South Island. I’m just wondered what constitutes a developer/speculator/trader versus someone who just made some money on a property deal. how is intent to sell calculated, and how can everyday people prove that they are not developers and are just selling at an opportune time?
You’re right I previously worked for the IRD in their investigations unit. During that time I conducted audits on a wide variety of taxpayers. Unfortunately the IRD has extremely strict rules about what I can say about their policies, so I’ll answer your question from a tax advisors angle rather than a former IRD Investigations officer.
Intention is a subjective test, but is determined objectively (and people wonder why tax is so confusing). There are two main parts of the legislation which property developers/traders/speculators may be caught on.
The first is purchasing a property with the intention of resale. Any profits made from this kind of sale are taxable. The IRD will be looking for things such as statements made to your bank manager, accountant or investors. If you tell the bank manager you need interest only financing for 24 months because you are going to sell the property then this is the kind of evidence the IRD can use to objectively prove your intention. Another key factor may be a history of buying and selling properties quickly.
The second is where you are in the business of developing, subdividing, erecting buildings ect. This kind of activity has more of a method to it than a one off buy and sell, and usually involves larger amounts of money and land.
To your last question: How can everyday people prove that they are not developers and are just selling at an opportune time?
I’m assuming that you own some rental properties and want to sell them. If you sell bare land for example it’s a lot more difficult to prove you aren’t speculating (because you’re not in the business of rental properties).
The answer is don’t make a pattern of buying and selling and have a good reason to sell your property. There is a tax case where a guy was in the business of rental properties, but over a period of time had bought and sold properties frequently. The IRD claimed he was trading, but the taxpayer had valid reasons for all of his property sales. He needed to repay a mortgage (because of financial difficulties), he sold some to friends, he sold some to buy better houses ect.
It’s best to check with your tax advisor before making any property sales to ensure you are getting the best advice for your exact situation.
Hopefully that answers your question Aaron.
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