Tax pitfalls await unwary bargain-hunters

TAXING TIMES

From time to time we all see something that we cannot resist buying, especially when we think it’s a bargain. Occasionally we may think that we can buy the item and sell it for a profit. Indeed, with access to internet facilities, it is relatively easy to buy and sell things. However, as with many transactions, there are often income tax and GST consequences lurking around that people need to be aware of.

In my years in tax I have heard many different and varied explanations about why things are not taxable. For example, I have been told that you have to buy and sell more than a dozen motor vehicles a year before the gain is taxable. I have also been told that you are not taxable on sales of motor vehicles unless you are a registered motor vehicle dealer. In relation to real estate, I have been told that it’s not taxable as we have no capital gains tax. Suffice to say this is all nonsense.

Last weekend, when in Cromwell, I became aware that some sections of land advertised for sale at $99,000 had all been sold. The terms of sale involved a small deposit, deferred settlement plus a $3000 home package for each section sold by April 5. I, too, had seen the advertisement for the sections and had mused to myself whether they may be worth a punt at that price and on those terms. When I learnt that they had all been snapped up, I wondered how many people had signed up to purchase the land with that reason in mind?

So what income tax and GST consequences may arise in those circumstances?

For income tax, the general approach taken in our law is to treat property sales (regardless of the nature of the property) as taxable in circumstances when something is purchased for the purpose of selling it. That is, if we buy something at a good price with the purpose of reselling it for a higher price, there is a very good chance that this is a taxable transaction. So, for example, if a person purchased a section at Cromwell with the specific purpose of selling it when settlement occurs, or even before settlement, there is a good chance that taxable income arises.

This does not mean that everything that is sold at a gain is taxable. The crux of the test is the person’s intention at the time of purchase. Thus, if a person purchased a section of land with the intention of building a house on it, but circumstances changed and the land was sold, any gain is not likely to be taxable as the intent at the time of purchase was not to acquire the land for the purposes of selling it.

Often things are acquired for more than one purpose. For example, a person may acquire a section of land with the intention of building a dwelling on it for use as a home, but with an eye to sale a little further down the track. In cases such as this the courts look at the dominant reason for acquiring the property. Was the dominant purpose for private occupation or for sale?

For income tax purposes the onus of proof rests with the taxpayer. Thus, if the Commissioner of Inland Revenue were to challenge a person’s reasons for acquiring a property in circumstances such as those immediately above, the onus rests with the taxpayer to establish on the balance of probabilities that the property was not purchased for the dominant purpose of sale. This invariably leads to an analysis of the facts to establish what was in mind at the time of purchase. While testimony from the taxpayer is important evidence, the courts will also have regard to the totality of the surrounding factual circumstances, and will test statements by the taxpayer against those facts. For example, the courts will look at a person’s history of purchasing and selling property of that nature, and the reasons for those transactions as well as things such as how the purchase was financed and how long the property was held before sale.

In relation to GST, the law differs from income tax in that one-off type transactions do not generally attract GST when sold if the person is not registered for GST. Rather, GST requires an activity that is carried on continuously or regularly. Thus, if there was a pattern of sales, GST may well become an issue. However, if the person that purchased the land is registered for GST then, assuming the vendor is GST registered also, the land will be zerorated on acquisition. However, the GST consequences on sale will depend on whether the new purchaser was GST registered or not. In many ways now, the GST rules can be more complex than their income tax equivalents.