When is a subdivision of land project which makes multiple houses a taxable activity for GST purposes?

The Inland Revenue Department (IRD) tried to answer this question under QB 24/04FS1 and QB 24/04 issued by IRD on 21st June 2024, along with Tax Information Bulletin Volume 36 #7, where a subdivision project and a taxable activity for GST purposes were discussed.

Below is our understanding of this serious question.

Basically, a subdivision project is a taxable activity when it's carried on continuously or regularly. The words “continuous or regular” were discussed in detail — what they actually mean, and this has to be determined on a case-by-case basis. It cannot be a one-size-fits-all approach.

The IRD mentioned a guideline based on numerous past cases, and based on that, they provided direction on how this can be ascertained. A lot of focus has been given to the number of lots created.

They said a high number of lots created means it is highly likely to be a taxable activity. Less number of lots created will have low impact, but this does not mean a one-off project will never be a taxable activity.

Hence, professional tax advisor input is required.

A Court of Appeal decision in the Newman case was discussed

In Newman, a builder bought the land and subdivided it into two lots. He kept one and sold the other.

IRD’s view was that this constituted a taxable activity.

Prior to Newman, this was the standard view — that such a transaction was subject to GST.

However, in Newman v CIR [1995] 17 NZTC 12/097, a Court of Appeal decision by Richardson J clarified that in determining taxable activity for GST, factual factors must be considered, including:

The scale of the subdivision
Level of development work
Time and effort involved
The amount of initial investment
The commerciality of the transaction

The Commissioner’s current view is that many of these factors are still relevant when considering whether a subdivision is a taxable activity.

A taxable activity is defined under section 6 (and s 6(1)(a)) of the GST Act. The main features of a taxable activity are:

There is an activity
The activity is carried on continuously or regularly
The activity involves a supply of goods or services to another person for consideration

The courts have held that “activity” is a broad concept. Subdividing land is almost always an activity. Subdivision involves the supply of goods and services for consideration, which is usually satisfied.
However, this is not always the case, such as where the subdivided land is kept for private use or not used for taxable supplies.

This means that in the context of a subdivision project, the critical question will always be: "Is the activity carried on continuously or regularly?" This is the only area where a taxpayer can argue: “I’m not doing this regularly — this is not a taxable activity.” The meaning of “carried on continuously or regularly” was discussed in detail by the Commissioner.

Their view is:

An activity is continuous if it is carried on over a period, in a sequence, uninterrupted in time.
An activity is regular if it is carried on according to a definite course or uniform principle of action, or where there is a proper correspondence between elements of activity.

It can be difficult to determine whether a subdivision project is continuous or regular. This is because land-related activities typically involve a lot of work, time, and cost, but the number of supplies may be quite low.

The leading case on this issue is Newman, where:

Mr. Newman, a GST-registered builder, bought 2.7 hectares of land to build a family home.
Due to financial difficulties, he subdivided the land to fund the completion of the home.
Minimal development work was undertaken (some drainage and electrical work).
One subdivided lot was sold.

The Court held:

The activity was not carried on continuously or regularly
Therefore, this was not a taxable activity

The Court of Appeal deliberately did not specify what would make a particular subdivision a taxable activity. Instead, emphasis was placed on:

Wider factors like scale and number of lots
These were also highlighted in the Commissioner’s commentary

Another relevant case is the Wakelin case, where the taxpayer:

Wakelin v CIR (1997) 18 NZTC 13,182 (HC).

Carried out subdivision work on a block of land
Divided the land into six residential lots over three years
The High Court found this to be continuous work and therefore a taxable activity

In a recent example, Case T62 (IRD Technical Decision Summary 22/21) covered:

A dispute involving a subdivision into two lots
The taxpayer moved into one house (House 1) and sold the other (House 2)

The IRD Audit Team found:

This was a taxable activity
Also subject to income tax under:
- Section CB 3 – profit-making purpose
- Section CB 6 – intention to dispose
- Section CB 12 – minor development scheme within 10 years
- Section CB 17 – residential exclusion did not apply

However, the IRD Tax Counsel Office disagreed, stating:

The sale was not subject to GST, as it did not constitute a continuous or regular activity
Section CB 17 residential exclusion did apply
Noted: There is no requirement to reside on the land for more than 50% of the ownership period – it’s not a time-based test

Even where GST does not apply, income tax may still apply on the sale of land. For example, under the Income Tax Act, even if not GST-registered:

If a taxpayer buys land with the intention of disposing it, any amount derived may still be taxable under:
- CB 6 – purpose/intention to dispose
- CB 10 to CB 15B – cover various subdivisions and developments
- CB 13 – references subdivision specifically

Don’t forget the Bright-line property rules also apply in many situations.

Examples:

Example 1 – Not Taxable Activity

A couple lived in a property for over 20 years. They subdivided the back portion and sold it.

The IRD viewed this as low-level work, only one part divided, and therefore not continuous or regular.

=> Not a taxable activity

Example 2 – Likely Taxable Activity

If three or more lots are created under a similar subdivision scenario,

=> Highly likely to be treated as a taxable activity.

Hope the above explains the concept of taxable activity in the context of subdivision of land. If you have any questions, feel free to reach out to us.