Property sales – business premises exclusion

The land taxing provisions deem certain sales of land to be subject to income tax, subject to a limited number of exceptions. One such is exception is for ‘business premises’. However, the circumstances in which it applies can be a grey area. Hence, two recent ‘Questions We’ve Been Asked’ (QWBA) issued by Inland Revenue (IRD) are welcome.

The treatment of business premises is different depending on the situation.

The first situation is the bright-line provision that taxes the sale of residential property sold within five years of acquisition. For the bright-line test to apply, the land must not have been used ‘predominantly as business premises’; irrespective of whether there is a dwelling on the premises. ‘Predominantly’ has both a time and space element to it. Hence, the land must have been used as a business premises for more than 50% of the ownership period, and more than 50% of the land area must have been used as business premises. The test does not require the landowner to occupy the land for the purpose of their own business – the test can be met where the land is let and used as the business premises of a tenant. Bare land (zoned residential) can also be classified as business premises where it is used for business activity. The exclusion operates on an all or nothing basis. Providing the land is used ‘predominantly’ for business premises, the sale of land will not be taxable pursuant to the bright-line test. However, if the land was only used, say 40% of the time as business premises, the test will fail and 100% of the profit on disposal will be subject to tax.