The land taxing provisions deem certain sales of land to be subject to income tax, subject to a limited number of exceptions.  One such 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.

The second situation is the use of the business premises exclusion contained in section CB 19, which overrides the application of the broader land taxing provisions (e.g. the dealer, developer or builder provisions). When using this provision, the business exclusion can be claimed if the land is the premises of a business and the person acquired or erected, and occupied the premises to carry on a substantial business from them. This requires the land to have been used in the business of the owner; if however, the land was let and used as business premises of the tenant, the exclusion cannot be used. It also requires the business activity to be “substantial”, which comes down to the application of case law. Although this is more stringent than in the first situation above, this exclusion can apply to part of a sale. For example, the sale of 100% of a mixed use commercial and residential property could be taxed under the brightline if the residential use area is larger than the commercial area, i.e. it is not predominantly business premises. However, in the second situation, the CB 19 exclusion can shelter the profit on the commercial portion of the building.

Overall, these recent QWBA publications provide clarity on the application of the business premises exclusion to different scenarios, and contain some good examples, so they are worth a read if you think they may apply.