While there are specific tax provisions dealing with real property, land and buildings, there are also nonspecific provisions that can impact personal property. IRD’s focus has been on enforcing property-specific provisions, but it’s timely to consider provisions that can tax personal property transactions and how they sit alongside property taxing provisions.

The taxation of personal property, which includes things like shares, crypto, gold, and even art and classic cars, is dealt with in three nonspecific sections.

1. CB3 – Profit-making undertakings or schemes.
2. CB4 – Property acquired for the purpose of disposal.
3. CB5 – Amounts derived from disposing of personal property where their business is dealing in it.

Profit-Making Or Schemes

“An amount a taxpayer derives from carrying out or carrying on a scheme entered into or devised to make a profit is income.”

In a recent legal decision, it was held that the subdivision and sale of property was not a scheme to which CB3 applied. The finding asserted that CB3 only applies where business characteristic is present overall. The subdivision and disposal of land can still be taxed under the land taxing provisions regarding development and division in CB12 and CB13.

Personal property acquired for disposal under CB4 is a wide-ranging provision. Taxpayers should consider the nature of the property in question, the person’s profession, the circumstances and motivations around buying, using and then disposing of it, the treatment of similar transactions, and the length of time the asset was held.

There is an elephant in the room. The fund management industry, operating around investment in stocks and shares, is in stark contrast to the property sector.

The Difference

Property managers are remunerated via a percentage of rental income they collect on behalf of a property investor. Therefore, the industry is motivated to increase the taxable yield from an investment property and there is no commission paid on movements in the value of the property itself.

The funds management sector remunerates itself based on a percentage of the value of funds under management. It tends to promote investment decisions based on assumptions around whether a share will rise or fall in value, rather than yield.

This leads to the obvious question of whether it’s genuine to argue that the selection of stocks in an “investment” portfolio is acquired for income or gain on disposal. Clearly the remuneration system rewards speculative success that increases the value of a portfolio.

For gains on disposal of shares to be taxable under CB4 they only need to have been acquired for disposal. It is not necessary for someone to be a share trader for a speculative transaction to be taxable.

One can only wonder at the level of non-compliance with this legislation while the property sector is enforced relentlessly.

Gold, Crypto

Assets like gold and crypto are typically taxable under CB4 because there is no income return from them and the motivation to buy tends to be based on making money from a rising cycle.

Assets like art and classic cars can also fall into this category, but it’s harder to enforce a tax imposition, given there is the argument these assets are acquired for personal enjoyment. It might not be silly, though, to have evidence of art being displayed, or membership of the local car club, if you dabble in these assets.

CB5 deals with assets traded as part of a business involving dealing in personal property.

The cornerstones of a healthy tax system are even-handed and fair enforcement. The government’s fixation on property-specific taxing provisions has seen the formation of the property compliance division and the introduction of bright-line rules to strengthen enforcement of tax on property transactions.

Perhaps it’s time for a call for more even enforcement of speculation in personal property, stocks and shares. There seems to be virtually no audit scrutiny to restore some fairness relative to the tax contribution made by the residential property sector, who are now paying tax on artificially distorted profits having been denied interest deductibility that is still available to all other business sectors.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. PKF Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz