Strata title matters
Question from Bernard updated on 3rd April 2013:
We have a 21 residential unit property in Wellington. It has been owned by a family trust since the 1980s. In the future we may wish to sell the property and we are looking at sale options to maximise potential returns. One of options is to strata title the 21 units, which I understand changes the nature of ownership from a residential investment to a developer with resulting tax implications. Please could you clarify the tax implications if we were to strata title the units and advise what structure is best if we decide to go ahead with this option.
Our expert Mark Withers responded:
There are several sections that can tax various types of land transactions and I would need background and detail to offer any certainty. With that said, section CB12 taxes gains derived from the division or development of land into lots where the work is done within 10 years of acquisition and is considered more than minor. You may well be unaffected by this given you have held the property for more than 10 years but arguments often centre on whether work is more than minor. In the case of Costello v IRD a taxpayer unit titled a block of flats with the only cost being legal work. IRD argued this was more than minor and succeeded in taxing the gain. There is a further section that can tax subdivision of land held longer than 10 years but this only applies where there is major expenditure on earthworks and roads. Also if the section allows an uplift in the cost base to market value which taxes only the development profit rather than the historic capital gain. I would also be wary about changing entity as you will have significant accumulated depreciation and the existing entity has already done a 10 year hold. Obviously the money at stake is significant so seek a formal tax opinion before deciding on a course of action.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.
Search the Ask an Expert archive
Browse all questions in the Ask An Expert Archive »