"Can you have a quick look over this agreement before I sign?"

For many advisers, it's a familiar request. By the time the phone rings, the finance may already be approved, the due diligence completed and the agreement only hours away from becoming unconditional.

That timing matters. Once a client has committed to the purchase, opportunities to revisit the ownership structure, financing arrangements, income tax implications, or GST treatment may be limited. Property tax advice is often most useful early in the transaction, while there is still flexibility to consider different options. Early engagement also provides an opportunity to educate clients to share all relevant details on a timely basis to optimise outcomes.

1. What is the client hoping to do with the property?

A property purchased as a family home raises different tax considerations from one acquired as a long-term rental, commercial investment or development opportunity. Even where the immediate intention seems clear, it is worth exploring whether there are longer-term plans to renovate, subdivide, redevelop or eventually sell the property.

Purpose or intent at time of acquisition is very important. Under section CB 6 of the Income Tax Act 2007 (ITA07), a purpose or intention of disposal does not need to be the client's only or dominant purpose. However, a vague intent to ultimately sell does not necessarily amount to the requisite purpose to dispose at the time of acquisition. For a family home, the residential exclusion in section CB 16 may apply to sections CB 6 to CB 11 where the relevant requirements are met, although the exclusion is not available where there is a regular pattern of acquiring and disposing of, residential land. A separate main home exclusion applies to the two-year bright-line test.

More broadly, the land taxing provisions in Subpart CB of the ITA07 contain a number of separate charging provisions, so the relevant rules will depend on the client's circumstances and activities.

2. How will the purchase be funded?

From 1 April 2025, taxpayers can generally claim 100% of the interest incurred on funds borrowed for residential rental property, provided the general deductibility rules are satisfied. While that change has simplified the position for many investors, it has not removed the need to consider how the borrowed funds have been used.

Questions about the use of borrowed funds, mixed private and income-producing borrowing, and loan tracing remain relevant. Keeping investment and private borrowing separate from the outset can make it easier to establish and support the appropriate interest deductions.

Full interest deductibility is only part of the picture. The residential rental loss ring-fencing rules continue to apply and may restrict the use of excess residential rental deductions against other income.

3. Could the property become taxable when it is sold?

The bright-line test is often the first issue clients raise. It is rarely the only one that matters.

For disposals on or after 1 July 2024, the current bright-line test generally applies where the property's bright-line end date falls within two years of its bright-line start date.

Subpart CB contains a number of other provisions that may apply depending on the circumstances, including those relating to land dealing, development or building activities, associated persons, and certain subdivisions or developments.

A property purchased as a long-term rental may, for example, later become part of a subdivision or redevelopment project. A change in plans does not automatically determine the tax outcome, but it should prompt a fresh review before work begins.

Section CB 6A does not apply if any of the other land taxing provisions in CB 6 to CB 12 apply. A common pitfall is the application of CB 6 where land is acquired with a purpose or intention of disposal. Holding a property for more than two years should not be treated as confirmation that any future gain will be non-taxable. 

4. Is the proposed ownership structure appropriate?

Once settlement has occurred, changing ownership may involve additional legal, financing and tax consequences, making it important to consider the proposed structure before the transaction proceeds.

Whether a property should be owned personally, jointly, through a company or by a trust depends on the client's overall circumstances.  Often the best structure reflects family requirements. Tax is a consideration but not the main determinant. Asset protection, succession planning, financing requirements and future investment objectives may also be relevant.

There is no single “correct” structure. The appropriate choice will depend on the client’s circumstances and should ideally be considered before they commit to the transaction.

5. Have the GST implications been considered?

GST may not arise in many private residential property transactions, but it should not be assumed to be irrelevant without considering the parties’ activities and intended use of the land. Where land will be used in a taxable activity, however, GST can quickly become one of the most significant tax issues in the transaction.

Before settlement, it is worth confirming whether the purchaser and vendor are GST-registered, whether the compulsory zero-rating rules for land apply, and how the purchaser intends to use the property. Where compulsory zero-rating is potentially relevant, the conditions must be satisfied at settlement.

6. What records should the client keep from day one?

Good record keeping rarely receives much attention when a property is purchased. Years later, it often becomes one of the first issues advisers need to address.

Documents such as settlement statements, loan records, legal invoices, valuation reports, invoices for repairs and capital improvements, rental records and GST documentation may all become important when determining deductions or the tax treatment of a later disposal.

Keeping those records does not determine whether expenditure is deductible, but it can help establish and support the correct tax treatment if Inland Revenue seeks further information or the property is eventually sold.

7. Could anything change after settlement?

A home may later become a rental property. A rental property may be redeveloped, subdivided or transferred to another entity. A business may begin operating from the premises, or the owner may register for GST. A change in circumstances does not necessarily result in additional tax, but it may require the income tax or GST position to be reconsidered.

Each of these developments has the potential to change the tax outcome. Reviewing the position before those changes occur is generally much easier than revisiting decisions after the event.

The value of asking early

There is a real need to educate clients to let their adviser know early what they are doing or intending. It is often too late once the adviser becomes aware, as the deal is done or substantially advanced or locked in.