When is a Subdivision Project a Taxable Activity for GST Purposes?

IRD has issued a consultation document PUB00427 which will replace its earlier position following the decision in Newman v CIR (1995)17 NZTC 12,097 (CA) case.

Former IRD policy was that a one-off subdivision creating an additional lot where simple subdivision was concerned involving no development work would not in itself give rise to a taxable activity

Whilst the CIR is still of the view that most principles as they applied before still need to be considered, their new view departs from that policy in some respects.

A subdivision project is a taxable activity when it is carried on continuously or regularly and involves, or is intended to involve the making of taxable supplies to another person for consideration. (i.e., selling off the new section).

Subdivision means dividing a parcel of land into two or more lots, or changing boundary lines. For the purposes of this consultation document subdivision also includes any development or building work carried out as part of the subdivision, as a degree of development work is often required for the purposes of consent application.

Whether or not a subdivision is carried on continuously and regularly will depend on the facts of each case. The factors that need to be considered include:

The scale of the subdivision
The level of development work
The number of lots created and sold
The time and effort involved
The level of financial investment
The level of repetition, and
Whether the subdivision is done in the course of furtherance of an existing taxable

The CIR is of the view that generally a small-scale subdivision creating one extra lot and sale of the bare land will not be a taxable activity. Similarly, a small- scale subdivision creating one extra lot, and the construction and sale of a single house on the lot, will generally not be a taxable activity.

GST – UNIT TITLE BODIES CORPORATE

IRD has issued an interpretation statement IS 23/08 which deals with GST and its application to Unit Title Bodies Corporate (UTBC).

Whilst UTBC will have a taxable activity, it will not be liable to register for GST as the value of supplies to its members is not counted towards the $ 60,000 GST registration threshold. S 51(1B) of GSTA.

A UTBC can voluntarily register for GST, in which case it will need to return GST output on supplies to its members, a one- off GST output adjustment in relation to investments it holds and can claim GST inputs on supplies it receives from third parties.

UTBC cannot claim a GST input tax credit on goods and services acquired pre- registration. It may claim a deduction under s 21F when pre-registration goods are disposed of, or deemed disposed of upon deregistration.

Levies that UTBC charges to unit owners for ground rent that relate to units used for the principal purpose of accommodation in a dwelling will not be considered “Taxable Supplies” and will therefore not be subject to GST.

Levies that UTBC charges to unit owners for ground rent that relate to units NOT used for principal purpose of accommodation in a dwelling will be a Taxable Supply and subject to GST.

Where UTBC receives court awards and out of court settlements, GST consequences may apply if the payment is sufficiently connected to a supply. Out of court settlements must be considered individually.

UTBC receiving an insurance pay-out will have an output tax liability on the amount it receives.

FORFEITED DEPOSITS FROM CANCELLED LAND SALE AGREEMENTS

IRD has issued an Exposure Draft PUB00434 which discussed the income tax treatment of forfeited deposits in the hand of the vendor arising from cancelled land sale agreements.

IRD determined that the forfeited deposits will be income to the vendor in following circumstances:

A forfeited deposit will be business income (s CB1), if the sale of land in relation to which agreement was cancelled was part of the current operations of the business or an ordinary incident of a business. (i.e., sale of land held on revenue account – property dealer). Forfeited deposit from sale of land held on capital account will not be income to the Vendor.
A forfeited deposit is income from a profit- making scheme if the Vendor is carrying on a profit-making undertaking or a scheme that involves the sale of land (s CB3). IRD is of the view that the same would apply if the vendor decided to abandon the profit-making scheme following the cancellation of the
As no supply has occurred the forfeited deposit will not be subject to GST.
A forfeited deposit is income if under ordinary concepts it has the character of income (s CA 1(2)). IRD’s view is that the nature of a deposit is a compensation for failure of the buyer to settle the transaction as opposed to being a penalty. The compensation payments take the character of what they replace.
For example, if the proceeds of the sale would have been taxable had the sale of land gone ahead (e.g., under land sale rules) then the forfeited deposit replaces that taxable income.
If proceeds from sale of land would not be taxable income to the vendor, then the forfeited deposit is nothing more than compensation for loss of capital

IRD further considers, that a forfeited deposit is not income to the vendor under the land sale rules as there is no “disposal” of land if the agreement is cancelled and the settlement does not take place.

November 2023