Special tax rules for businesses in property-related activities
If you have an association with people in certain property-related industries there may be a tax impact on all or some of your property transactions. even if you personally are not a property dealer, developer or builder.
These impacts could mean the difference in the gain from the sale of a property being treated as taxable income or as a non-taxable capital gain.
Associated person rules may make a property sale taxable when there is an association with a:
- property dealer when the property was bought
- property developer when the property was bought
- builder when significant improvements started on a property.
In addition, the associated person rules changed for land acquired on or after 6 October 2009 with the effect of widening some associations.
For these people, even properties that weren’t bought for business purposes may be taxable if the property is sold within 10 years of:
- the purchase or
- completion of improvements (for builders).
These rules may apply to any properties bought during the period of your property-related business activities, even if you sell a property after you’ve ceased those business activities.
Exceptions to the special tax rules
There are exceptions to these special rules, for example:
- where the property you sold had been used primarily as your family/private home,
- or if you used it as your business premises, other than for rental activities.
If however there is also a regular pattern of buying and selling the family/private home, the exception may not apply.
Example
Trent started buying and selling residential houses in 2002. By the end of 2002, he had established a regular pattern of buying and selling and was a dealer for tax purposes.
Trent co-owns Trent Rentals Ltd, a company that buys residential rental investment properties.
In January 2003 the company buys a rental property to hold and rent. In December 2008, rentals in the area are falling and it sells that property. Income tax would not normally be due on the profits from the sale, because the company bought it as an investment.
But, because Trent Rentals Ltd is associated with Trent, who:
- established himself as a dealer before this property was bought
- and it was sold within 10 years,
Trent Rentals Ltd must pay tax on the sale regardless of the company’s original intention to hold as a rental investment.
If you or an associate have been involved in a business which deals in land, building and construction work, or in subdividing or developing land, we strongly recommend you talk to a tax advisor to understand the special tax rules related to your situation.
You should get advice before selling any property you have held for less than 10 years, if it isn’t part of your or your associate’s business.
We strongly advise you to get professional tax advice if you think any of the association rules may affect you.
Date published: 30 Jul 2010
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