When is a property 'acquired'?
If you 'acquire' a property with an intention of selling it or if you 'acquire' a property at the time you are associated to a land dealer/developer/trader, the IRD will expect you to pay income tax on any profit on the future sale of that property.
Because the test is when the property is 'acquired', it is important to establish when the property was 'acquired'. Without any definition under Tax Law, this is a bit of a grey area. So, when the IRD released its brochure about buying property off the plans, it raised some interesting issues illustrated by the two examples they provided.
The first example was of a person who purchased a home off the plans intending to on-sell the property. As this person's intention was to sell the property, income tax is payable.
The second example was of a person who purchased a home off the plans intending to live in the property. However, prior to going unconditional the person decided against living in that area and sold the home instead. The IRD said that as the intention was to sell the property, income tax is payable.
In the second example given by the IRD, the date when the property is 'acquired' appears to be the time at which the property goes unconditional as opposed to when a conditional offer is made or when the property settles. Not only does the term 'acquired' have implications for people buying off the plans, it is perhaps even more relevant to investors that have an associated entity that is a developer.
Let say that you have a development company that is being wound down and you want to purchase an investment property. You go unconditional on that investment property before the development company is completely wound up. You settle 12 months later on the investment property which is after the development company has been wound up. In that example, the investment property would be deemed to have been 'acquired' on unconditional date which is when the development company was still in existence so the investment property is 'tainted' meaning it has to be held for 10 years for income tax not to apply.
By realising that the date a property is 'acquired' is the unconditional date, it may provide some ability to structure your affairs in such as a manner to reduce any potenial income tax or at least provide certainty of when you can sell a property so that income tax does not apply.
Disclaimer: The above article is general in nature and we recommend you seek professional advice tailored to your specific personal situation.