Articles by Anthony Lipscombe.
Imagine this: A few years ago, after careful saving and financial planning, you managed to buy an investment property. Your goal from the outset is to hold the property long term. You do some work to add value, and intend keeping it for many years to come to fund your retirement.
To your surprise, one day you get a notification that a government agency needs the land for road, rail, or some other form of public infrastructure, and you are subject to a compulsory acquisition order. You are told that you will be paid today’s market value, which is a positive.
However, your immediate concern is that when you get market value you will be making a profit as far as tax law is concerned, and the property is still within the applicable “bright-line period”. You might think that there would be a concession in the bright-line rules for property bought by a compulsory acquisition. Regrettably, if you do think that, you will be disappointed. There is no such concession. Any gain you make through a property being compulsorily acquired by the Crown in a situation like this is taxable.
There is a silver lining here, though, because the Public Works Act requires the Crown to provide compensation for the financial impact of compulsory acquisition. This means we have seen instances where this has happened, and a settlement has been negotiated with the Crown to cover costs of the compulsory acquisition such as tax to pay under the bright-line rule.
So far so good you might think, but what happens if you had bought the property 25 years ago? When the compulsory acquisition goes through, there is no tax liability because the property was purchased long before the bright-line rule even existed. Here’s the catch: if you want to take the proceeds from the compulsory acquisition and put that into a new investment property, you are suddenly within the bright-line period. Capital growth on the existing property that was going to be tax free to you on eventual sale, is now transformed into potentially taxable capital gain.
Furthermore, it could be a negative impact for you under the interest non-deduction rules (at least until the new government’s proposed changes take effect). If the purpose of public work legislation is to ensure that an affected owner is no worse off as a result of a compulsory acquisition, then surely a tax liability that arises in relation to a replacement asset, that would not have existed but for the compulsory acquisition, should be taken into account? At the moment there appears to be a gap between what is fair and equitable for an affected property owner in a situation like this and how the rules are being administered. We hope that commonsense prevails in due course.
In the meantime, if you own a property and have been served notice of compulsory acquisition, please contact us for tax advice. We can also refer you to lawyers who specialise in this area. One such recommendation is Adina Thorn, who GRA have worked with on several occasions.
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Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.
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