Partner at Clark Boyce Lawyers
How to subdivide your property
"Subdividing" is where land is divided and separate legal title is established for each of the new sections that are created. A separate title is established by the District Land Registrar issuing a certificate of title (in the Land Titles Office at Land Information New Zealand (LINZ)), after receiving an application and a subdivision plan.
There are various reasons why you might want to subdivide your property. It may be that your residential section is now too big for your needs, or you may own a farm that is capable of being subdivided into lifestyle blocks. Your section may have been re-zoned, so that you are now permitted to subdivide.
The subdivision of land is controlled and restricted by a number of Acts, the most important of which is the RESOURCE MANAGEMENT ACT 1991. This Act brought planning and subdivision controls under one system. The effect of the Act is to prohibit all subdivisions unless they're specifically allowed by a rule in a District Plan or by a resource consent.
What is the procedure for subdividing?
If you're considering subdividing your property, you'll need to consult a lawyer who is experienced in this field to examine, first, whether subdivision is permitted and, second, whether it's feasible. This will involve searching the legal title to your property and examining the District Plan that applies to your property (see below).
The subdivision process is lengthy and involved. However, the following is an overview of the likely steps:
- obtaining a resource consent from your local council (see How to obtain a resource consent)
- preparing a survey plan
- the sealing of your plan by your local council
- lodging the subdivision plan with Land Information New Zealand
- the approval of the plan by LINZ
- lodging the new titles with the Land Titles Office at LINZ
Complying with the District Plan
An important part of determining whether subdivision is permitted in your case is examining the relevant District Plan. This will reveal:
- the zoning that applies to your land
- whether subdividing is a "prohibited activity" under the plan, and if not, then what type of activity it is (for the different categories of activity, see How to obtain a resource consent)
- what conditions apply
- what discretion the council can exercise
- specific restrictions on subdividing
It's also likely that the District Plan will specify the minimum areas for the new subdivided lots. Often it will be necessary for you to consult a surveyor or planner on this question.
Is subdividing worth the time and cost?
If you're considering subdividing, you should give particular attention to the time and cost involved. It's almost certain that the standard process will be lengthened by delays caused by, for example:
- any hearing that is necessary
- the need to complete specific work so that you comply with conditions that are imposed
- the need to obtain consents from the council
- the preparation of legal documents
Subdividing is also a costly exercise. The costs you will be likely to incur include fees charged by consultants, surveyors, the local council, LINZ, engineers and your lawyer.
If you're relying on the proceeds of selling the subdivided land to finance the venture, you should be aware that it may be some time before you receive this money. Numerous costs will have to be met at various stages, and it's unlikely that you'll be able to delay paying them. Further, it's unlikely that a lender will be prepared to treat potential profits as adequate security for any borrowing that may be required.
Will I have to pay income tax on the profits I make from selling the land?
This depends on when you begin your subdivision scheme and on how much work is involved.
If you begin the subdividing process within 10 years after you first bought or were given the land, you'll have to pay income tax on the profits if the work involved in subdividing the land is not "of a minor nature". (It makes no difference when you sell the subdivided land.)
You may come within an exception to this rule, and not have to pay income tax â€“ for example, if you subdivided the property to build a private home for you or for a member of your family, or for the purposes of you carrying on a business from the property.
In deciding at what point you can be said to have begun subdividing, Inland Revenue will look for the first definitive step you took. This might consist of engaging surveyors or applying for a resource consent.
In deciding whether or not the work involved is minor, IRD will make an overall assessment of your case, taking into account the time, effort and cost involved, measured both in absolute terms and relative to the nature and value of the land. The IRD has given the following example of a "minor" subdivision. Half a hectare is subdivided off a 50-hectare property, and is sold for $50,000. The costs are $4,700 for surveying, $550 for an entrance way, and $1,000 for legal fees. The IRD says, however, that this is a borderline case, and additional work such as fencing or removing gorse could make it more than minor.
If the first step in subdividing is taken more than 10 years after you acquired the land, you will have to pay income tax on the profits if subdividing the land involved significant spending on:
- earthworks, contouring, levelling, drainage, roading, curbing or channelling, or
- any other work, service or amenity that's customarily provided in major projects involving the development of land for industrial, commercial or residential purposes
Will I have to pay GST on the profits?
You may have to pay GST if the IRD can establish that your subdivision is a "taxable activity" for GST purposes (see How to work out whether you must register for GST). If you merely do a one-off subdivision of your land into two lots, with no development work, and you continue to live on one lot and sell the other lot, this won't be a taxable activity and therefore you won't be liable for GST. In other cases it will depend on factors such as:
- how many lots you're creating
- the amount of development work involved
- the amount of your financial investment
- how much time and effort is involved
For example, the Courts decided that the following subdivision was a "taxable activity", and therefore the taxpayer was liable for GST: the subdivision created six residential sections, water was installed for two of them, an engineer's report was obtained, easements for stormwater discharge were created (although the physical works were not done) and local authority rating and reserve contributions were paid.
- If you're contemplating subdividing as a profit-making venture you should be aware that it's a speculative and risky exercise, with many pitfalls and hurdles. It's virtually impossible, unless you're experienced with the process yourself, to complete a subdivision successfully without the services of a lawyer who's familiar with this area of the law.