You may be familiar with section CB 12, which taxes gains on the sale of land where the land has been developed or divided under a scheme of development or division that was commenced within ten years of the land being acquired and the work involved was more than minor.
While several exemptions can apply, this rule often impacts property investors who subdivide land from a rental property within ten years of purchase. Commonly, they may wish to retain the existing dwelling and sell the new section, or alternatively, sell the old house and build a new dwelling on the subdivided portion.
Either way, any scheme of division within ten years of acquisition requires investors to carefully consider the impact of CB 12.
The inclusion of the phrase “the provision won’t apply when work is only minor” naturally raises the question: how much can I do before I cross the line?
For many years, taxpayers and advisers relied solely on case law for guidance. A leading example was Costello’s Case. Costello undertook a unit titling exercise on a block of six flats within ten years of acquisition and then sold some of the units. The work was principally legal in nature, yet it was still held to be “more than minor,” rendering the disposal gains fully taxable. The bar was accordingly set very low and arguing that work was “only minor” became an argument of last resort.
Fortunately, the IRD has since issued clearer guidance on determining whether work crosses the threshold into taxable territory.
There are four key factors to consider when assessing whether development or division work is minor:
1. Total Cost of Work – Absolute and Relative Terms
Whether development or division work is considered minor depends on both its total cost (absolute) and its proportion of the land’s value at the start (relative).
Costs of $50,000 or less are considered low in absolute terms, while relative costs under 5% of land value are considered low — serving as practical “safe harbours” for assessment.
Both metrics should be considered, as one may be low while the other is high. This cost factor is assessed alongside the three others, but if the absolute cost is particularly high, that alone may indicate the work is not minor.
2. The Nature of the Professional Services Used
Development or division projects often involve professionals such as solicitors, surveyors, engineers, or valuers. If their involvement is extensive or the work is complex, the project is unlikely to be minor.
It’s worth noting that a scheme is only considered to have commenced when the first overt act to proceed occurs — for example, letting a contract to a surveyor or undertaking physical work like tree removal. Preliminary work associated with assessing whether a scheme is viable (before a formal “go/no-go” decision) is distinct from the scheme itself.
3. The Extent of Physical Work Required
A greater degree of physical work generally indicates that the development or division is substantial rather than minor. However, limited physical work does not automatically mean the project is minor — the other factors still need to be weighed.
4. The Significance of Changes to the Land’s Physical Nature and Character
The more significant the changes to the physical nature and character of the land since the development or division began, the less likely it is that the work will be considered minor.
Often, the conditions attached to a resource consent provide a good indication of whether your costs are likely to exceed the “minor” threshold.
However, even if you stop at obtaining consent — deciding discretion is the better part of valour — and sell the property with the consent in place, you may not be entirely in the clear.
Section CB 14 lurks in the statute, ready to tax gains arising from non-physical changes to land — such as the mere granting of a resource consent.
But that’s a story for another day.