Inland Revenue has released six draft amended Questions We’ve Been Asked (QWBAs) concerning land sales and the bright-line test. The updates reflect recent technical law changes and provide clearer distinctions between the bright-line test and other land sale rules.

The QWBAs are useful for their technical detail, particularly in differentiating the bright-line test from other land sale rules.

Two items that examine the general land sale rules are:

• PUB00460: When is land acquired for a purpose or with an intention of disposal so that the amount derived from the sale is income?
• PUB00488a: When do I have a “regular pattern” of transactions that prevents me from using exclusions from the land sale rules for my residence or for my main home?

Purpose or intention of disposal

PUB00460 is a draft item concerning section CB 6 of the Income Tax Act - a land sale rule outside of the bright-line test. Under section CB 6, proceeds from land sales are taxable if the land was acquired with the purpose or intention of disposal.

The bright-line test applies only where the other land sale rules do not. Therefore, the other rules should be considered before applying the bright-line test.

Key clarifications from the draft QWBA include:

• Timing of intention: The relevant intent is assessed at the time of purchase. If at the time of purchase, you intend to dispose of the land, the sale proceeds are taxable – even if the sale does not occur until many years later.
• Multiple purposes: The rule applies even if disposal was not the sole or dominant purpose. This of course raises the question as to how to test whether there is a “purpose or intention”. Many people purchase land aware that they may not hold it forever. The item clarifies that there must be a firm purpose or intention. It cannot just be a vague idea or a possibility in the future. The clarification is useful, even though the application of the test will obviously be fact-specific.
• Definition of “disposal”: This term means sale or similar transactions but does not include unintended dispositions, such as on death.
• Exclusions: The item also explains the two main exclusions from section CB 6, which are the exclusions for a residence or for business premises.

Regular pattern of transactions

The second draft item explains the “regular pattern” rule, which negates the exclusions to the land sale rules. If the “regular pattern” rule applies, the sale will be taxable even if the land was, for example, the primary residence of the owner and would normally be excluded.

Key points from the draft QWBA:

• What constitutes a “pattern”: A “pattern” means a similarity or likeness between transactions. Intention is not relevant – it is merely the nature and regularity of the transactions that is considered.
• Difference from the bright-line test: The bright-line test applies a simpler, less nuanced exclusion for the “main home” exemption, allowing only two uses of the exclusion within two years before a bright-line sale, irrespective of transaction nature or regularity.

This draft clarification emphasises that while the bright-line test operates on strict time-based criteria, the general land sale rules require a more detailed factual analysis of transaction patterns.

Next month we will look at the draft bright-line test items and share CA ANZ feedback on the proposed changes. Stay tuned.