Inland Revenue’s Draft View On Section CB 3: A Wider Net, But Not A Capital Gains Tax

Inland Revenue has released a draft interpretation statement considering when a disposal of land may be taxable under section CB 3 of the Income Tax Act 2007. The draft, PUB00519, follows an earlier consultation in 2024 and reflects a revised view on the relationship between section CB 3 and the land sale rules, particularly sections CB 12 and CB 13.

The central question is whether the land sale rules form a complete code for taxing land disposals. Inland Revenue’s draft conclusion is that they do not. In the Commissioner’s view, section CB 3 can, in some circumstances, apply to disposals of land even where none of the specific land sale rules applies.

That conclusion is significant, but it is important not to overstate its practical impact.

The draft is not suggesting that section CB 3 operates as a broad catch-all taxing provision for profitable property transactions. Much of the statement is devoted to explaining why section CB 3 has meaningful limits and why its application remains confined to particular fact patterns.

At its core, section CB 3 taxes amounts derived from an undertaking or scheme entered into or devised for the purpose of making a profit. Inland Revenue considers that an undertaking or scheme is simply a plan, design or programme of action directed towards an end result. However, for land transactions, not every undertaking or scheme falls within the provision. The dominant purpose of the undertaking must be profit-making, and the sale must involve more than the mere realisation of a capital asset.

The Commissioner's analysis starts with the proposition that the land sale rules were never intended to exclude the operation of other taxing provisions. Inland Revenue relies on the wording of section CB 3, legislative history and case law to support the view that Parliament did not intend the land provisions to entirely occupy the field. The draft also takes the position that sections CB 12 and CB 13 were introduced to supplement, rather than replace, section CB 3.

Importantly, however, the Commissioner also accepts that where a specific land sale rule applies, that provision should generally take priority over section CB 3. Inland Revenue describes section CB 3 as effectively operating as a residual provision where an amount is not already taxed under a more specific rule.

The concept of mere realisation is arguably the most important practical limitation in the draft.

The Commissioner accepts that a taxpayer can take steps to maximise the value of a capital asset before sale without necessarily entering into a profit-making undertaking or scheme. In the land context, this may include straightforward subdivisions involving limited work, or ordinary renovations undertaken to improve a property's presentation before sale. The critical distinction is whether the taxpayer is merely selling an existing asset to best advantage, or whether they have created something new or fundamentally changed the character of the asset.

This distinction runs throughout the examples included in the draft. A relatively simple subdivision involving limited work on the land may amount to nothing more than realising a capital asset in smaller pieces. By contrast, constructing one or more new dwellings on subdivided land is viewed as creating something new and may extend beyond mere realisation. Similarly, repainting, recarpeting and replacing fittings are generally treated as ordinary preparation for sale, whereas a complete redevelopment or extensive renovation that substantially changes the character of a dwelling may point towards a profit-making undertaking or scheme.

The most noteworthy aspect of the revised draft is Inland Revenue's discussion of the exclusions from the land sale rules.

One concern raised by submitters was that allowing section CB 3 to apply to land disposals could undermine exclusions for residential land, business premises, farmland and investment land. Inland Revenue directly addresses that concern and, in doing so, adopts a more measured approach than some may have expected.

The Commissioner states that the exclusions and section CB 3 are dealing with different concepts. The exclusions relate to the taxpayer's capital use of the land, whereas section CB 3 focuses on whether there is a separate profit-making undertaking or scheme. Critically, Inland Revenue expressly acknowledges that in most cases where an exclusion from a land sale rule applies, section CB 3 will also not apply, because the sale will simply be the realisation of a capital asset.

That statement is important. It demonstrates that Inland Revenue is not seeking to sidestep the land-rule exclusions through section CB 3. Rather, the Commissioner accepts that those exclusions continue to have meaningful application.

The draft nevertheless identifies a limited category of cases where section CB 3 could still apply despite a land-rule exclusion being relevant. Inland Revenue's view is that this may occur where the taxpayer embarks on a distinct profit-making venture that is separate from the capital use of the land protected by the exclusion. The example given involves residential land that is subsequently redeveloped into multiple townhouses for sale. In that situation, the taxable activity is not the earlier residential use of the land, but the later profit-making project.

Viewed in this way, the Commissioner’s position is not one of extending section CB 3 to all profitable property transactions. Rather, it is an attempt to preserve a distinction between the ordinary realisation of capital assets and projects that have become separate profit-making ventures.

The draft also highlights several practical indicators that may be relevant when drawing that distinction. The nature and scale of the activity, the level of commitment of time, money and effort, the extent of any transformation of the land, and whether something genuinely new has been created are all potentially relevant considerations. Equally important is the taxpayer's dominant purpose at the commencement of the undertaking or scheme, assessed objectively in light of the surrounding facts.

For advisers and property owners, the practical message is clear. The first step remains identifying whether a specific land sale rule applies. If it does, that provision will generally determine the tax outcome. If no land sale rule applies, section CB 3 may need to be considered, but only through the lens of its established judicial limitations. The enquiry is not simply whether a profit was made. Rather, it is whether the taxpayer entered into a profit-making undertaking or scheme and whether the activity moved beyond the mere realisation of a capital asset.

Overall, PUB00519 confirms Inland Revenue's view that section CB 3 remains capable of applying to land disposals. At the same time, the draft repeatedly emphasises the limits imposed by the concepts of dominant profit-making purpose and mere realisation. In that respect, the statement is perhaps best viewed not as a broad expansion of the tax base, but as a clarification of where Inland Revenue believes the boundary lies between a capital transaction and a profit-making venture involving land.

Nevertheless, the views expressed in PUB00519 add another layer of complexity to an already intricate area of tax law, requiring taxpayers and advisers to consider section CB 3 even where a specific land sale rule does not apply. This raises a broader policy question: would greater certainty be achieved if New Zealand’s land sale taxation regime were codified into a more complete legislative framework, rather than relying on the interaction between multiple provisions and evolving judicial concepts?