The rules that tax certain sales of land include exclusions relating to a person’s main home. These exclusions are not meant to apply where the taxpayer has a “regular pattern” of buying and selling land used as a main home, residence or business premises.
A tax policy consultation document, Habitual buying and selling of land, released today discusses concerns around obfuscating or avoiding evidence of a “regular pattern” and proposes possible solutions.
By way of background  and  of the tax policy consultation document provide that:
4. The land sales rules contain various exclusions for land used as a main home, residence or business premises. If one of these exclusions applies, an amount that would otherwise be subject to tax under one of the land sales rules, will not be taxable (for example, an amount derived by a land dealer from selling land will not be taxable if the land dealer used the land as their residence while they owned it).
5. However, the main home exclusion in section CB 16A, the residential exclusion in section CB 16, and the business premises exclusion in section CB 19 do not apply where there has been a regular pattern of buying and selling property used for such purposes. The restriction assumes that a person who has a regular pattern of buying and selling land primarily acquires that land for sale and should be taxed on any gain, whether or not they used the land as their residence or business premises while they owned it.
 sets out the issue as viewed by Inland Revenue as follows:
9. As currently drafted, all of the regular pattern restrictions apply quite narrowly to the activities of a single person. This allows taxpayers to circumvent the application of the regular pattern restrictions by buying and selling land using different but associated persons or entities each time (for example, the first property is purchased by the person, the second is purchased by their partner, the third by their family trust etc).
The following example at  is illustrative of the issue with structures involving interpolated trusts (from Inland Revenue’s perspective):
Example 1: Residential exclusion
Mr and Mrs A have a history of purchasing rundown residential properties to renovate and sell. They live in the properties while they renovate them, and each property is sold within two years. To date, Mr and Mrs A have repeated this pattern five times. The first property they purchased was held in Mr A’s name. The second property was held in Mrs A’s name. The third property was held in the name of the A Family Trust. The fourth property was held in Mr A’s name. The fifth property was held in the name of the A Property Trust.
Under the current rules, the regular pattern restriction in both the residential exclusion in section CB 16 and the main home exclusion in section CB 16A would not apply. This is because a person has not engaged in a regular pattern of buying and selling land used as a residence or main home of that person.
The proposed amendment (whereby regular pattern restrictions apply where a person, or a group of people or entities has a regular pattern of buying and selling land that has been occupied in a manner that allows an exclusion) would ensure that the regular pattern restriction would apply to this scenario because a group of people has engaged in a regular pattern of buying and selling land that was all occupied as a residence or main home by Mr and Mrs A (who control the A Family Trust and the A Property Trust).
Importantly it is noted at  and  that “While officials consider that the regular pattern restrictions require amendment to ensure that taxpayers cannot structure around them, it is not intended that such amendments should result in ordinary commercial or family transactions, where there is no purpose of sale, being taxed.”
The regular pattern restrictions are not intended to apply where people move from time to time as a result of changes of circumstances. However, sensible parameters must be considered. See for instance the pre-bright-line trading position in Trustees liable for serial property purchases.
Submissions close on 18 October 2019.
For more on the bright-line test see Spotlight on the “bright-line” test.
- Habitual buying and selling of land, A tax policy document September 2019
- Income Tax Act 2007, s CB16, CB 16A, CB 17