2 Year Selling Rule – Will I be taxed on the Property?

The Government announced in its last budget that they intend tax sales of residential land that has been owned two years or less.

The use of the term “Bright-line” refers to a clear connection between an event and a tax outcome, something they are seeking to do with the legislation that is currently only at Bill stage.  This means that Parliament still has to clean it up before it becomes law.  What is unsettling is we will all be caught by it in a matter of weeks, with 1 October 2015 being the magical date.

I should point out that the test is in addition to the existing laws around purpose and intent.  If you were acquiring the property for the primary purpose of resale, or undertake significant work to improve value for resale, you will be required to pay tax anyway.

I will also emphasize that the test only applies to residential property.  Commercial and industrial property need not be concerned.  There are many variations within these three categories, so the bill currently has rules to cover:

• A buy and sell that doesn’t get registered on the title,
• Asset rich companies and trusts,
• Determining whether the main home exclusion applies,
• What is residential land,
• Farmland and business premises,
• Serviced apartments,
• Inherited land and relationship property transfers ,
• Anti-avoidance,
• Company amalgamations,
• Deductions for expenses,
• Treatment of losses.

There are no rules around associated person transactions currently, which means sales within a Group for a restructure will currently be caught.  Not a good omission by the Government!

The test applies to residential land acquired on or after 1 October 2015.  The date that a sale and purchase agreement is entered into is the critical date.

For agreements entered into on or after 1 October 2015, the date of acquisition (or start of the two year period) will be the date of registration of the change of ownership on the title.  The date of sale is set as the date the sale and purchase agreement is entered in to.

Less than two years?  Gains will be taxed as income.  Ouch.

Bounce – a little relief for Dairy Farmers

The Global Dairy trade auction overnight saw prices of Fonterra’s products lift by 10.9% to $US2,226 a tonne.  While volumes were down slightly (1,039 to 35,865 tonnes), this is a ray of light for struggling Dairy Farmers.

A NZ Dollar buys only $US0.6334.  This compares to a peak of $US0.8822 in July 2014.  How does this help?

The Dairy Farmers have received some assistance from the weaking NZ Dollar against the US Dollar as well. To put it in absolute terms, 1 tonne at current prices and the current exchange rate equates to $NZ3,514.37.  To obtain the same return back in July 2014, the tonnage rate would have needed to be, on average, $US3,100.38.

Dairy Futures are also showing an expected value of $US2,500 by April 2016.  At the current exchange rate (and most economists expect the NZ Dollar to continue to weaken against the US Dollar), this would equate to $NZ3,946.95.

So, a little recovery in prices and a drop in our exchange rate are certainly a step in the right direction for our Dairy Farmers.