Tax and Land - An overview of the recent changes

Real Estate Update

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There have been three sets of tax reforms in the last year impacting on land, with the latest set of changes due to come into effect on 1 July 2016. This article gives a brief overview of those changes and, hopefully, will dispel some common misconceptions about the changes.

The first misconception is that the changes only relate to residential land; this is incorrect as the first set of reforms covers all land. The second misconception is that the changes introduce a capital gains tax on residential land; this is not the case. The third misconception is that the changes only impact non-residents; which again is not the case. 

Change 1: Tax information and compliance measures 

From 1 October 2015, additional information in the form of a land transfer tax statement must be completed when any property is bought, sold or transferred (subject to limited exceptions for, what may loosely be referred to as, main homes). The information is provided to Land Information New Zealand. The information to be provided includes the IRD number of the transacting parties and non-residents also have to provide their home country tax identification number. 

Also introduced at this time was a requirement for overseas persons (which can include New Zealanders who are non-resident) to have a New Zealand bank account before they will be issued with an IRD number. This is intended to give the IRD greater certainty about the identity of the people involved (on the basis that the banks will have conducted 'know your client' identification procedures). 

The purpose of these reforms was to improve compliance with income tax laws generally, through making more information available. They were enacted through the Land Transfer Amendment Act 2015 and the Tax Administration Amendment Act 2015

Change 2: The 2 year bright-line test for residential land 

From 16 November 2016, an 'objective' standard was introduced to bolster and expand the pre-existing rule that if land was acquired with a purpose or intention of resale then the proceeds from the sale or disposal will be income. That standard was in the form of bright-line test - if residential land is sold within two years of acquisition, the proceeds will be income. Limited exceptions apply in relation to properties that meet the 'main home' requirements. There are a number of fish-hooks with this test, in particular that the rules for determining the date of acquisition differ to the rules for determining the disposal or 'bright-line date' (ie it is not as simple as looking at the dates the person appears on and is removed from the certificate of title). 

This change was enacted through the Taxation (Bright-line Test for Residential Land) Act 2015

Change 3: Residential land withholding tax 

From 1 July 2016, a new withholding obligation will exist which is designed to enforce the bright-line test noted above and to aid the IRD's recovery of tax owed by offshore persons. Residential land withholding tax (RLWT) will apply if: 

  • The land sold is 'residential land' located in New Zealand, and 
  • The vendor is an 'overseas RLWT person' and the proceeds of sale would be income under the bright-line test (ignoring some parts of that test including the 'main home' exemption). 

In simple terms, 'residential land' is land on which there is a dwelling or the relevant district plan permits one to be erected. It also captures land for which the owner has an arrangement relating to erecting a dwelling. However, it doesn't include farmland or land used mainly as business premises.

The term 'overseas RLWT person' is widely defined and includes: 

  • Any individual unless they are a: 
    • New Zealand citizen who has been in New Zealand within the last three years, or 
    • The holder of a residence class visa for New Zealand who has been in New Zealand in the last 12 months. 
  • Trustees of a trust if: 
    • More than 25% of the trustees are 'offshore RLWT persons'
    • More than 25% of the people who have the power to appoint or remove trustees, or to amend the trust deed are 'offshore RLWT persons'
    • All beneficiaries are 'offshore RLWT persons'
    • Any beneficiary, including a discretionary beneficiary, is an 'offshore RLWT persons', and either: 
      • that beneficiary has received a distribution in the four years preceding the disposal of the residential land, or 
      • the trust has disposed of other residential land within four years of the disposal of residential land. 
    • A company, partnership, or any person which/who: 
      • Is incorporated outside New Zealand or constituted under a foreign law. 
      • Not being a natural person, is registered outside New Zealand. 
      • Is a company and more than 25% of either the directors or the persons (in)directly holding the 'shareholder decision-making rights', are 'offshore RLWT persons'. 
      • Is a limited partnership and more than 25% of the general partners are 'offshore RLWT persons'.
    • Also, a partner in a limited partnership and those with interests in 'look-through companies' can be caught if 'offshore RLWT persons' account for more than 25% of those (in)directly holding the partnership shares or look-through interests. 
Calculating the amount of RLWT to be withheld in any case will be somewhat complex, as it is the least of three calculations (each of which involves defined concepts): 
  • 10% of the 'current purchase price'
  • RLWT rate x ('current purchase price' - 'vendor's acquisition cost')
  • The greater of: a. zero; or b. 'current purchase price' - 'security discharge amount' - 'outstanding rates'. 
The RLWT rate currently is 33% or 28% for companies. 

The vendor is liable for the RLWT (unless the vendor and purchaser are associated in which case the purchaser is liable to withhold it). However, in practice the withholding obligation will largely fall on conveyancers (for the vendor, or, if the vendor doesn't have a conveyancer, on the purchaser's conveyancer). The RLWT amount will be deducted from the sale proceeds (ie before it reaches the vendor's pocket) and paid to the IRD. 

There is ability to seek an exemption from the RLWT regime. However, this is limited to the 'main home' exception residential land developers who either meet minimum thresholds in terms of past tax compliance or who provide adequate security to the IRD. 

The RLWT regime was enacted through the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Act 2015

Closing comment 

The three reforms bolster the existing income tax rules that relate to land, through both widening the tax base (the two year bright-line test) and assisting the IRD in its assessment and collection functions (by the information-collection process and withholding regime). Several concerns have been identified in relation to the reforms and we anticipate that some degree of remedial work will follow. 

If you have any questions, or require further information regarding any aspect of this update, please contact us.

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