Property Speculation Tax Act 1973

This commentary item was published in Public Information Bulletin Volume 75, November 1973

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The Property Speculation Tax Act 1973 became law in August 1973. The tax relates to all "dispositions" of "land" taking place on or after 15 June 1973.

Under the Act, a profit on the "disposition" of "land" by any "person" is liable for the tax when -

• There is a period of 2 years or less between "date of acquisition" and "date of disposition", and
• The profit is not exempt from the tax (see below under Exemptions).

The terms in quotes are defined in the Act.

Land, of course, includes an interest in land and buildings or other improvements.

A disposition of land includes the sale of an interest in land and the sale of an option. It can also include the sale of shares in a land-owning company.

The dates of acquisition and disposition are generally the dates on which possession is given and taken.

A person includes a company, local, public or Maori authority and an unincorporated group of individuals.

Exemptions

Sales or other Dispositions After Two Years

When the land has been held for more than 2 years by the vendor, there is no liability for Property Speculation Tax.

Exemption applies to land acquired and disposed of within 2 years in the following circumstances:

Binding contract before 15 June 1973

If -

• The "date of disposition" (generally the date on which possession is given and taken) is on or after 15 June 1973, BUT
• A binding contract was entered into before 15 June 1973

-the transaction is exempt.

A contract is regarded as binding on a vendor even though subject to conditions, provided the conditions are outside the control of the vendor e.g. subject to the purchaser raising finance.

Sale of Own Residence

Generally exempt if -

• Bought as a residence with no intention of resale at a profit, and
• The reason for resale developed after purchase and was not principally to realise a profit.

For sales within the two year period the vendor should advise the tax office of the reasons prompting the sale. This can be done in the "exemption" panel on the back of the Property Speculation Tax Certificate (IR21A).

Obvious examples of acceptable reasons for an early sale would be transfer to another town, change in family circumstances, or unsatisfactory features in relation to present residence. Clearly, if a pattern of such transactions emerged, the reasons advanced would require closer scrutiny.

The same tests will in general apply to -

• A person who acquired a section intending to build a residence but for some reason found it necessary to sell the section before proceeding to build.
• A property bought as a residence but never occupied because of unforeseen circumstances.

Sales of Business Premises

In general terms, the tests for exemption of disposition of business premises are similar to those for the home owner disposing of his home.

Exemption on these grounds is generally not available to businesses which consist principally of -

• Buying and selling land.
• Developing land and buildings for sale.
• Erecting buildings on land for sale.
• Investing in real estate.

Sales After Substantial Improvements Effected

Renovation of Existing Buildings - Exempt if all the following conditions are met -

• the value of existing improvements at date of acquisition is at least half of the purchase price, and
• the cost of renovations is at least 20%* of total costs prior to disposition, and
• - the owner has made the renovations as part of his business as a builder or renovator. (The Act requires him to be "wholly or principally engaged in a business of renovating buildings or in a business of erecting buildings, the activities of which include the renovating of buildings".)

Here is an example:

As the improvements amount to not less than 20% of the total costs such a sale within 2 years would be exempt.

*A simple test to determine the minimum amount of improvements required is to take one-quarter of the purchase price.

Building or Development - Exempt if improvements added between acquisition and disposition are at least 40%** of total costs prior to disposition.

Here is an example:

As the improvements amount to not less than 40% of the total costs such a sale within 2 years would be exempt.

**A simple test to determine the minimum amount of improvements required is to take two-thirds of the purchase price.

A self-employed builder or renovator may have a fair valuation of his own labour taken into account in deciding whether the 40% or 20% improvement requirement has been met, but cannot deduct the value of his own labour in arriving at his profit. The value of labour should be agreed with the tax office where necessary.

A Will or Intestacy - Exemption applies to the transfer of properties coming to the executor or administrator of an estate or to a beneficiary under a will or intestacy. These may also be disposed of by the trustee or beneficiary without being subject to the tax.

Compulsory sales to the Crown or a local authority are generally exempt.

Certificates, Returns And Payments

• In respect of all dispositions of land a special certificate (Form IR21A) is required irrespective of whether or not Property Speculation Tax is payable. These forms are available from all tax offices.
• This certificate should accompany the instrument which is presented to the tax office for Stamp Duty purposes.
• A simpler procedure for dispositions clearly outside the 2 year period is being examined.
• If there is a liability for property Speculation Tax a Return Form (IR21) should be sent to the tax office by the vendor. This return is required within 2 months from the "date of disposition" and payment must be made at the same time.

Calculation Of Profit

In general terms, the "assessable profit" will be the difference between the sale price and the cost price of the property plus and minus any intervening receipts and expenditure not taken into account for income tax purposes.

The point about income and expenditure for income tax purposes is that income, such as rents, and expenditure, such as repairs and maintenance, will be properly returnable for income tax purposes in the normal way.

Rates Of Property Speculation Tax

If a transaction is liable to Property Speculation Tax it is not also liable to income tax. For land held more than 2 years, there could still be a liability for income tax under the provisions of the general tax law, but this will depend on the particular circumstances of each case.

Other Matters

The Property Speculation Tax Act should be referred to for particulars of matters not covered by this item.

Examples are - 

• Where land is gifted (or there is some element of gift), the values and dates to be taken into account for donor and donee.
• Allowable losses.
• Company share transactions treated as land dispositions.
• Leases with optional or compulsory purchase provisions.
• Penal tax and publication of names for evasion.
• Anti-avoidance provisions to combat attempts to "get around" the Act.

If you want more information on any aspect, please get in touch with the nearest tax office. We will also send, on request, a copy of the working notes given to our staff. These notes give more detailed information.