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Would a new development acquisition fall under the land business exemption?

This question is from Mel:

I have recently bought a property and intend to build a minor dwelling on the property. Does this fall under the land business exemption?  With regards to the development exemption, what is considered starting the development For example, is applying for council consent or engaging an architect/building company considered starting the development? 

The Inland Revenue Department has kindly provided the following response:

The proposed land business exemption only applies to interest incurred relating to land that’s held on revenue account, as part of a business which develops, subdivides, or deals in land, or which erects buildings on land. This type of property when disposed of, will be taxable under section CB 7 of the Income Tax Act 2007. It is important to note that if the land is not held on revenue account under section CB 7, the interest for that land might still be subject to the interest limitation rules unless another exemption applies.

With regards to the development exemption, the exemption applies from the date an undertaking or scheme to develop, subdivide or a build on the land for the purpose of creating new build land begins. The date of commencement is when the first step in carrying out the undertaking or scheme takes place. It’s a question of fact in any given case as to whether the undertaking or scheme has moved beyond conception to having been put into operation. Please refer to IS 20/08 from [35] and QB 15/04 from [39] for more discussions.

Please note even if the exemptions apply, interest is only deductible if there is a sufficient nexus with deriving taxable income.

If the proposals are enacted, guidance will be made available on the Inland Revenue website. In addition, a technical explanation of the legislation will be made available on www.taxpolicy.ird.govt.nz shortly following enactment. 

We recommend investors consider seeking advice from a tax professional once the legislation has been enacted if they are unsure about how the legislation applies to their circumstances.

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