Buying and Selling 'Off the Plan'

Thursday 17 December 2009

By Sharon Cohen
Accru Smith Chilcott, Auckland

If you do your homework and everything goes to plan, then buying ‘off the plan’ may be a good proposition, but there are risks associated with the cheaper initial price so investors need to beware. Added to this, there is now uncertainty around tax rules in New Zealand and contract legislation in Australia.

As the media has reported in recent years, some property development companies have encouraged investors to mortgage their homes to finance the purchase of ‘off the plan’ properties. Some have required investors to pay deposits in advance so the development could commence, while others have offered the option to buy back the property before the settlement date. This can prove risky for investors because the companies can wind down before the development commences, or the development takes years to complete.

In New Zealand and Australia, properties commonly offered for sale ‘off the plan’ tend to be land and home packages, apartments, units and retirement village homes. It is also common for the unfinished properties to be bought and sold several times before legal title is issued.

The New Zealand IRD’s latest position

In November 2009, New Zealand’s Inland Revenue Department (IRD) issued a publication containing information for people who bought property ‘off the plan’ and were considering selling it. The IRD said that if the property is purchased with the intent of resale, the profit is considered taxable. Their view has caused controversy with chartered accountants as many say it is not based on New Zealand income tax legislation.

In its publication, the IRD defines investors who have been buying and selling property ‘off the plan’ as ‘traders’ – making these types of transactions taxable. The IRD also stated that they have been monitoring ‘off the plan’ sales information and found that not all sales were being reported.

New Zealand does not impose capital gains tax, but the publication says that when property is sold ‘off the plan’ there is intention for resale, hence profits will be taxable and losses will be deductible. The IRD’s view is that ‘intention’ is determined at the time the contract to purchase the property becomes unconditional.

A recent New Zealand tax court case involved a partnership that owned a sheep station. The partners decided to put the land into a separate entity. They incorporated a family company and entered into a sale and purchase agreement to sell the freehold estate to the company. One of the issues in this case was what would amount to purchasing land with the 'purpose or intention' of selling it. The partners acknowledged that the purchase of the land was a ‘stepping stone’ to a more valuable property and that they had knowledge of the resale potential of the land. The Court held that if purchasing a ‘stepping stone’ farm was enough to be considered as an intention to sell, the legislation would catch almost every first time farm buyer. Therefore, one could expect the Court’s approach to be applicable to non farming properties.

The IRD publication has also created controversy because it does not appear to have given consideration to changes of situation for investors who had purchased ‘off the plan’ properties and then had to sell.

The potential impact of a new Australian law

In Australia, the ‘off the plan’ landscape also looks set to change. The proposed new Australian Consumer Law designed to protect consumers could also have an impact on ‘off the plan’ contracts. If enacted, the law will allow the Courts to make void ‘off the plan’ contracts if the terms within the contracts are held to be ‘unfair’.

Property experts say this could provide buyers with loopholes to get out of contracts should the property market take a dive from the time the contract was signed to the time of completion.  This could impact on developers being able to secure the finance needed to initiate new residential building projects, as banks will often only finance property development for new apartments and townhouses if the majority of homes have been sold before construction starts. Some in the property industry also think the new law could lead to developers insisting on clauses in sale contracts requiring the purchaser to declare whether or not they are an owner-occupier or investor.¹

The new law was recently debated in the Senate and is expected to be fully implemented by 1 January 2011.

With this uncertainty in both New Zealand and Australia, potential ‘off the plan’ buyers should obtain advice from a professional before entering into a contract or paying any money. Please feel free to contact your local Accru adviser if you would like to discuss this issue further.

¹ _{Aaron Gadiel, CEO Urban Taskforce Australia, Letter to Hon Kevin Rudd MP PM, 17 November 2009}