What is the intention test?

The intention test asks one simple question: “Did you buy this property (or share, or other asset) with the intention of selling it for a profit?”

If the answer is yes – even if you hold the property for 10+ years – you might have to pay tax.

It’s not about what you eventually do, but why you bought it in the first place.

For example, if you buy a property and plan to hold it for 5 years, then sell it and use the profit to pay off a mortgage ... that sounds like a clear intent to sell for gain. 

You could be caught under the intention test and have to pay tax. 

But if your plan is to have a long-term investment to generate rental income and you’re hoping it goes up in value ... but not banking on it ... then it’s likely you're not captured. That’s even if you held the property for only 3 years.

So you likely wouldn’t pay tax on any capital gain.

More from Opes:

• What taxes do property investors need to pay?
• Does New Zealand have a Capital Gains Tax?
• How Do I Pay Less Tax On My Investment Properties? Tax Minimisation 101 For Property Investors | Ep. 868

How does the IRD know what my intention is?

Here’s the most important part – “How does the IRD know what your intention is?”

Yup, this is the tricky bit.

The IRD can’t investigate your thoughts … but they could look at documents to try to see what your intention was. Things like:

• Your mortgage application – did your broker write down that you planned to sell it in X years 
• and even your mortgage broker’s notes – again, did they write down that you planned to sell it in Y years. 

For example, they might contact your bank and ask for the notes your mortgage broker made. 

If those notes say: “Client plans to buy, renovate, and sell within 3 years for profit”  … well, that’s evidence against you and you’re probably going to pay tax.

OK, but what about long-term investors?

Most long-term investors want their properties to go up in value. They might even run scenarios using software like Opes+. 

I’ve helped a lot of investors buy and sell properties over the last 2 decades. Not one long-term investor got caught under the intention test. Not one long-term investor got a surprise tax bill.

These are the people who hold for 10 to 20 years, rent their properties, and build wealth slowly. 

Of course, they hope the property goes up in value. Who doesn’t? 

But hoping for capital gains is not the same as intending to sell for gain.

The IRD even says this explicitly. 

For example, let’s say you buy a property to live in with your children. You hope it will go up in value and help leave a legacy for your kids, but your primary intention is to provide a home. 

So later, if you move for a job and sell up ... you don’t have to pay tax, even if you made a profit.

How do I avoid getting caught out?

New Zealand has a self-reporting tax system. 

You declare your own profits and you’re responsible for getting it right. 

So when you come to sell your property … unless you declare that your intention was to make a profit … you don’t pay tax. 

Of course, the IRD could always investigate you to make sure that’s the case. And if that happens, what matters is the evidence. 

So here are my tips for you:

• Make sure your mortgage broker notes reflect your genuine intent (e.g. “long-term rental investment”)
• Keep records of any plans showing you intended to rent the property
• If circumstances change (like a divorce or job transfer) document that too.

Remember, the intention test applies across all asset classes. 

Whether it’s property or shares, if your main reason for buying something is to sell it later for a profit ... it could be taxable.

Here’s my take on the intention test

In my view (as an investor, rather than an accountant) is that the intention test is to capture people who aren’t playing within the spirit of the rules. 

As mentioned before, we have a 2-year bright-line test in NZ. 

But, what if someone keeps buying properties then selling after 2 years and 1 day? 

They’re outside the bright-line test … but that’s not the intention of the rules. 

So that’s where the intention test is useful. 

Here’s another example. The bright-line test doesn’t cover the main home. 

So if you keep buying property, live in it, do it up and then sell for a profit … and you do it lots of times … are you really playing by the rules?

That’s also where the intention test comes in. 

If, on the other hand, you’re buying a rental for the long term and you’re running long-term wealth projections with capital growth included ... that alone doesn’t make your gains taxable in my view. What matters is why you bought the asset in the first place.

Yes, you should worry, if you’re deliberately gaming the system (like the above examples).

But if you’re a long-term investor and acting in good faith, the IRD is unlikely to target you when you come to sell.