Demystifying Tainting
What’s the deal around Tainting for property developers, dealers and builders?
Let’s start with what is tainting? Tainting is what happens when you have someone in the business of dealing in land, developing land be it subdividing or putting things on it or erecting buildings. Where someone buys land as part of one of these activities they will be taxable no matter how long they own it when they sell it. They are taxable if they bought it as part of these activities even after 10 years.
A dealer is someone who buys something and sells it typically in the same condition. A developer changes it and a builder puts things together on it. Developers can be builders and builders can be developers and they can both be dealers so you have to consider all three limbs and there is a relevance for that in a moment. If a developer, dealer or builder buys a piece of land into an entity that is a developer, builder or dealer they will be taxed on that if they sell it within 10 years of acquisition. Now that is not just residential land and Brightline that is commercial land, farmland or any other sort of land that you could imagine. So if it is not part of those trading activities it will still be taxable if disposed of within 10 years.
The problem is it doesn’t just extend to those particular entities that are in the business of dealing, developing and building it applies to associated persons. Now it is beyond today to tell you who is associated Part YB of the Income Tax Act 2007 has extensive definitions and it is very difficult to break association. If you think you are associated you are probably associated. But it defines who is and isn’t associated. Now the problem with this is if an associated person of a dealer, developer or builder buys a piece of land they will be taxable on that if they dispose of it within 10 years of acquisition so again you have got to check not just the entity that is the builder, dealer or developer but all the associated persons.
The test is at the time of acquisition for a dealer or developer. If when the associated person acquires that land, did an associated person carry on that business of dealing or developing. For a builder it is not when you acquired it, it is when you carried out work of more than a minor nature, so typically when you do something on the land and it doesn’t need to be done by the associated builder it could be done by a third party. The problem for a builder is you may build a new building and in 8 years you may refurbish it for a new tenant, if you are not careful that could also restart the 10 year period for you. So it is not just a one-off for builders it is a lot trickier.
The other half of tainting is section CB15 now this is one that people don’t really know about and it is probably a more difficult section to deal with. What it says is that if a vendor sold a piece of land that would have been taxable on it and they sell it to an associated person as defined in Part YB, that associated person is treated as if they were the vendor and taxed as such. So if you bought a piece of land as a development you have cut it up into a bunch of units or apartments and you want to sell some and keep some, so you are going to sell some out of that development entity to a family trust or an investment structure the 10-year rule won’t apply it is going to be taxable no matter how long you keep it. So section CB 15 and Part YB are very difficult to deal with and as a general rule, we don’t encourage taxpayers to try to keep some of their developments unless there is some way to clearly delineate it. So these are tricky areas you need to be careful and you need to get advice. Tainting isn’t something that lasts forever, when you do cease to be a dealer, developer or builder obviously and buy something new you don’t have to consider tainting. So it is not a permanent tattoo it is just something that is temporary that applies while you carry on those activities, so get advice, be careful and again make sure that you read the legislation and the exemptions very carefully.
If you do need some clarity around your situation then please contact Nigel Smith (nigel@covisory.com), +64 21 377 280 or fill out our contact form below.