What is a ‘regular pattern’ of acquiring or erecting and then disposing of your own home, and why does it matter?
“REGULAR PATTERN” OF BUYING AND SELLING WHAT?
The disqualifying provisions simply use the terms “dwelling houses” and “residential land”. Read literally, a regular pattern of buying and selling (or erecting and selling) any dwelling houses and any residential land would disqualify the person from the exclusions. If this were correct, builders and land dealers, for instance, whose business involves such dealings, would never be protected by the exclusion.
The sensible interpretation must be that it is only a regular pattern of buying (or erecting) and selling one’s own home (or one’s main home) that will disqualify the person from using the exclusion. The exclusion is for a person’s own home or main home, so any disqualification from the benefit of the exclusion due to a pattern of behaviour should be directed only at behaviour concerning the person’s previous own homes or main homes.
That is also the interpretation of the Commissioner of Inland Revenue. 5
The Commissioner noted that though s CB 16(3) (or s CB 16A(2)(b)) does not expressly state that the disqualification is limited in this way, this interpretation is justified by the wording of the predecessors of s CB 16(3) and there was no intention to narrow the exclusion.
WHAT IS A “PATTERN” AND WHEN IS SUCH A PATTERN “REGULAR”?
Taking first an overall view of the disqualifying provisions, it is clear that they are meant to prevent people who have some history of buying (or building) and selling their own homes from taking advantage of the exclusions. Equally clearly, not everyone who has such a history will be disqualified, but only those whose transactions could be described as exhibiting a regular pattern.
The High Court decision that the Commissioner has cited in her recent commentary on this topic considered it under the Land and Income Tax Act 1954. 6 In that decision – Parry v Commissioner of Inland Revenue
– the Court examined three transactions to ascertain if they formed a regular pattern of erection and disposal
of dwelling houses lived in by the objectors as their family homes. 7
The Court took the view that a “pattern” denoted a similarity or likeness in the transactions and went on to say that in determining the degree of similarity or likeness, the Court had to take into account factors such as type and location of the sections, the type of dwelling houses erected, the method of erection, the use to which the dwelling houses were put, in particular whether they were occupied by the objector, and any other characteristics that
may be relevant in assessing similarity.8 Parry v Commissioner of Inland Revenue (Parry) concerned taxpayers who built, lived in and then sold a dwelling each time. Interestingly, so did all the other cases that were referred to by the Commissioner in her commentary (Case 5/2013, Case M102 and Case C9) as well as Case K21, cited in Case 5/2013. 9
It was found, in all those cases, that there was a pattern of behaviour that was relevant to the disqualifying provision in force at the time. For instance, in Case 5/2013, the taxpayers had built and lived in nine houses in 12 years, leading the Taxation Review Authority to conclude (unsurprisingly) that there was a regular pattern of erecting and disposing of dwellings. Each case will obviously turn on its own facts, but it is likely to be easier
for a pattern to be established where the taxpayer sets out to build a “standard” family home each time. Given that people who repeatedly build dwellings, live in them and dispose of them in short-order have the imperative of maximising profits and minimising construction costs and time, it will be easier for the Commissioner or the Courts in those cases to find similarities in matters such as location of sections, type of sections, type of dwellings, building materials used and so on. However, a person who acquired and disposed of dwelling houses would not be so constrained. If Parry were to also apply to situations involving acquisition and disposal, the Commissioner
would have to take into account, for instance, the type and location of the dwelling houses acquired, the type of sections they were built on, whether the dwellings bore any similarity in terms of size and so on.
The writer’s view is that with the wide variety of dwellings available these days, it may be more difficult to discern a pattern of acquisition and disposal if the Parry formulation is strictly followed. A person could, for instance, purchase an apartment in a multi-storey block in a city centre, move to a townhouse in a block of two, say on the fringes of the city, move to a stand-alone three-bedroom “family home” in the suburbs and move back to
an apartment, say one in a gated community. Under the Parry formulation, it might be a struggle to find any similarities in the transactions, and therefore a pattern of acquisition and disposal, at all. The only common elements would be that dwellings were acquired and disposed of and that the taxpayer lived in them, but
those elements would be insufficient to establish a pattern as they are inherent in every transaction that falls to be conside
Pam Davidson is a barrister who specialises in tax matters. Her recent book Taxation of Property Transactions in New Zealand is published by Thomson Reuters.