What is land partitioning? Partitioning occurs where two people acquire land together then subdivide the land to enable each person to own their own individual lot, partitioning the land parcel and transitioning the joint ownership of the entire lot to individual ownership of respective portions of the original lot.

Prior to the introduction of section CW 3C, the act of subdividing the land, then disposing of the respective titles to individual owners, was considered a taxable disposition of the land following the subdivision process.

The exemption provisions are designed to avoid a tax liability occurring when there has been no effective change in “economic ownership” following partitioning of the jointly held land.

For example, two people purchase a land lot as 50/50 co-owners, each putting in half the money. The owners then pool resources and subdivide the land into two lots, and each lot is then allocated to each co-owner individually.

Taxable Income

A disposal of land therefore occurs when the joint owners dispose of the land to the individual owners. Prior to CW 3C this disposal could give rise to taxable income.

However, there is a snag. For the income to be entirely exempt, the ownership proportions by value must not have changed by more than 5 per cent.

A definition of “co-owner” has been introduced to recognise that land can be held in different capacities before and after the partitioning. So, for example, if one co-owner’s spouse joins them on the title after the land is partitioned, this will not necessarily upend the tax-exemption provisions.

One unintended consequence of partitioning land is that the co-owners may have created an entity that is in the business of dividing the land or building on it to affect the partitioning.

New Provisions

The new provisions anticipate this and do not impose a “tainting” to the land lot the individuals acquire from the co-owners because of such an entity being formed to undertake the division work.

There has also been a subsequent amendment to these rules that clarifies what occurs if the partitioning does result in the ownership proportion by value changing by more than the 5 per cent safe harbour threshold.

If this does occur, and economic ownership is altered because of the partitioning, income is only generated “to the extent” there was a change in ownership proportions on the partitioning of the land between the co-owners. Income will only apply where the person’s end value proportion is more than their acquisition proportion by more than 5 per cent.

Valuations

Determining whether these ownership proportions have altered will require the parties to get valuations of the land lots they each are left in possession of so the value of their economic proportions can be compared to their contributions to the original land acquisition and subdivision cost.

So, a few technical issues to work through when applying the legislation, but nonetheless a welcome change for those looking to uncouple from joint ownership arrangements by subdividing land. ν

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