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Bright Line Test (3): Subdivision/ Development and the Bright Line Test

 

In the next two editions, we will continue to discuss the topics arising from the Bright-line test. The particular topic we wish to deal with is focused on “subdivision/development and disposition of some of them and to retain some of them by a family trust”.

Example

In 2016, Keith buys an empty land in Auckland which is zoned for residential – 1 Sky Road, Auckland. He plans to develop the land by subdividing it. He visits the local council and learned that he may be able to subdivide the land into 20 small lots. He then plans, subject to the cash flow, to build a residential building on the land, in stages, and then sell some of those. He may end up retaining some of those sub-divided lots, whether a building on it or otherwise, if they are not sold on the market.

Keith plans to hold, eventually, those unsold lots in the name of a company he is going to set up.

In late 2016, David comes to Keith and they agree that David can buy a small lot (Lot 1/ 1 Sky Road, Auckland) from Keith “off the plan”.

The first issue is whether the subdivided small lot is a “residential land” for the purpose of the Bright-line test? It is likely to be considered to be a residential land because of two reasons. First, the zoning for the underlying land is residential and therefore the zoning for the Lot 1 is to be a residential lot accordingly. Second, it is a bare land that can have a dwelling erected on it under the relevant district plan. This follows that the sale from Keith to David is subject to the Bright-line test.

The next issue to consider is that, if the transaction between Keith and David is subject to the Bright-line test, how does the IRD calculate the amount of taxable income, if any. We unfortunately advise that there is no rule on this particular point of question. Nonetheless, we would assume that it is going to be a matter of mathematical calculation, provided the taxpayer accepts that the income is taxable income.

Another issue is whether the “change of name from David to his family trust is subject to the Bright-line test?” Technically speaking, the sale from David to his family trust is equivalent to a “disposal” under the Income Tax Act 2007. The real question comes down to whether the family trust is considered to be “associated with David.” If it turns out that the family trust is not associated with David, then the disposition to the family trust will immediately trigger the Act to apply and, depending on the amount of sale to the family trust, two further minor questions wait to be answered. First, whether the sale is considered to be a “sale at a market value” or “sale under the market value.” If the sale is considered to be “at a market value”, then depending upon the amount of income David derives, the Bright-line test will apply and calculate the amount of tax to pay.

Alternatively, if the transaction between David and the family trust is one of those “associated transactions” as defined in the YA of the Act 2007, assuming the amount of sale was at a market value, then the purchase of the land(s) by the family trust will not trigger the Act immediately under the CB15. Thus, it becomes important for the “owner” of the family trust to reside in the home to meet the requirements under CB16 and CB16A thereby the owner can claim main home exemption in due course.

Who are the “owners of the family trust?” We will deal with this question in detail in the next edition.

This article is designed to give general information to the audiences and readers of this article. This is not designed to provide a legal advice to a particular person of particular circumstance. If you have any enquiries, you should seek legal advice on that issue. A. B. Lawyers Limited does not accept any liability arising from misjudgment by the audience, without having independent legal advice on his/her case.