While there are specific taxing provisions dealing with real property, land and buildings, there are also non-specific provisions that can impact personal property.
For some time, the IRD’s focus has been on the enforcement of the property specific provisions. However, it’s time we looked at the provisions that can tax your personal property transactions, and consider how they compare to the specific property taxing provisions.
The taxation of personal property (which includes things like shares, crypto, gold and even art or classic cars) is dealt with in three non-specific sections:
- CB3 – Profit-making undertakings or schemes
- CB4 – Personal property acquired for the purpose of disposal
- CB5 – Amounts derived from disposing personal property when a business is dealing in it.
Profit making undertakings or schemes (CB3)
A profit-making undertaking/scheme is described as ‘a plan or project someone enters into or creates with the objective of making a profit or income’.
Interestingly, in a recent legal decision, it was ruled that the creation of a subdivision and the subsequent sale of property in that subdivision didn’t count as a scheme to which CB3 applied. The finding said that CB3 only applies where ‘business characteristics are present overall’.
That said, the subdivision and disposal of land can still be taxed under the land taxing provisions regarding development and division in CB12 & CB13.
Personal property acquired for the purpose of disposal (CB4)
Personal property acquired for disposal under CB4 is a surprisingly wide-ranging provision. When considering its relevance, taxpayers should take into account:
- the nature of the property in question,
- their profession,
- the circumstances and motivations around buying, using and then disposing of it,
- the treatment of similar transactions,
- the length of time the asset was held.
There is perhaps a large elephant in the room when it comes to the way the fund management industry operates around investment in stocks and shares, which sits in stark contrast to the property sector.
Property managers are typically remunerated via a charge based on a percentage of the rental income they collect on behalf of a property investor. As such the industry is motivated to increase the taxable yield from an investment property. There is no commission paid on movements in the value of the property itself.
In contrast, the funds management sector remunerates itself based on a percentage of the value of funds under management. As such, it tends to promote investment decisions based on assumptions around whether a share will rise or fall in value – rather than the amount of dividend it may yield.
This leads to the obvious question of whether it’s genuine to argue that the selection of stocks in an ‘investment’ portfolio is acquired for income or for gain on disposal. Clearly the remuneration system rewards speculative success that increases the value of a portfolio.
For gains on disposal of shares to be taxable under CB4 they need to have only been acquired for disposal. It’s not necessary for somebody to actually be a share trader for a speculative transaction to still be taxable.
One can only wonder at the level of non-compliance to this legislation while the property sector continues to be enforced relentlessly.
Assets like gold and crypto are typically taxable under CB4 because there’s no income return from them. The motivation to buy them tends to be to speculate on making money from a rising cycle.
Assets like art and classic cars can also fall into this category, but it’s harder to enforce a tax imposition given the argument that these assets are mainly acquired for personal enjoyment. However, if you do dabble in these assets it might not be silly to actually have some evidence of art being displayed, or a membership to the local car club!
Amounts derived from disposing personal property where a business is dealing in it (CB5)
Lastly, CB5 deals with assets traded as part of a business that involve dealing in personal property. An example of this might be someone who buys from garage sales and resells items on trade me for a profit.
The trick here is having systems to show the difference between private assets that weren’t acquired as part of the business, and revenue account property that is. Systems like operating a business account and inventory systems for items purchased may help to differentiate business items from personal.
One of the cornerstones of a healthy tax system is that enforcement is even handed and fair across all legislation.
The government’s fixation on the enforcement of legislation of the property specific taxing provisions has seen the formation of the property compliance division. It’s also seen the introduction of the Brightline rules to strengthen enforcement of tax on property transactions when there is even the hint of speculation. This has extended now to a ‘quasi-capital gains tax’, with Brightline being pushed out to 10 years.
Perhaps it’s time to call for more even enforcement of speculation in personal property, stocks and shares, where there seems to be virtually no audit scrutiny. This would hopefully restore some fairness relative to the tax contribution made by the residential property sector, who are now paying tax on artificially distorted profits having been denied the interest deductibility that’s still available to all other business sectors.