New Zealand's Capital Gains Tax is Another Step Closer

That string comes in the form of the proposed withholding tax on residential property sales.  Yet another acronym to contend with, the Residential Land Withholding Tax (RLWT) was announced in the Government's Issues Paper released yesterday.

Recent measures

The RLWT regime comes fast on the heels of other measures the Government has enacted this year to try to cool the property market.  Those being:

• the obligation for buyers and sellers to provide their IRD numbers, and in the case of offshore buyers and sellers, their offshore tax number as well;
•  the requirement for offshore taxpayers to have a New Zealand bank account before they will be issued with an IRD number; and
• the new bright-line test

These new measures won't apply if the property is the person's main home.

Aiming to have this new withholding tax regime in place by 1 July 2016, the RLWT will apply to residential property sales by offshore persons which are caught by the bright-line test.

Bright-line test

Draft legislation for the bright-line test is expected to be enacted this month and will take effect from 1 October 2015.

The bright-line test will treat most residential property sales as taxable if the sale occurs within two years of acquisition, with the exception of a person's main home.

For the bright-line test to be effective however, there needs to be a robust mechanism for collecting the tax owed; the RLWT is proposed to be that mechanism.

Withholding regimes on property are commonplace overseas, such as Canada, the US, and Japan.  Even Australia has recently mooted a withholding tax on land sales by foreign investors.

Deducting the tax

At this stage the New Zealand Government intends for conveyancers or solicitors to act as withholding agents.  The conveyancers will be required to deduct the RLWT at the time of settlement and pay it to the Inland Revenue.  Feedback is sought as to whether this should be undertaken by the vendor's or purchaser's conveyancer.

The deduction of the RLWT will be required where the vendor:

• is an offshore person, and
• acquired the property after 1 October 2015, and
• has not owned the property for more than two years.

This means conveyancers will need to obtain this information from their client and act accordingly.  If the conveyancer believes the information provided is false, they will be required to deduct the RLWT from the sale proceeds anyway.

Clearly compliance obligations are going to increase for both vendors and conveyancers.  The conveyancer will have to register with Inland Revenue as a RLWT agent, obtain the necessary information and administer to collecting and paying the RLWT where applicable.

These obligations may in fact fall to the purchaser where there is no conveyancing agent.

The way the regime will work is that the vendor will be able to claim a tax credit for the RLWT deducted when they include the property sale in their end of year tax return.

Offshore persons

While all this sounds like a lot of added compliance work for vendors, conveyancers and possibly purchasers, remember it is only property sales where the vendor is an offshore person and the property is not the vendor's main home (or the property is not relationship property or inherited property) that will be subject to the RLWT regime.

An offshore person is typically a non-resident of New Zealand however, for an individual, an offshore person can include a tax resident who has been out of New Zealand for the past year, or a New Zealand citizen who has been out of New Zealand for the past three years.  An offshore person can also be a non-individual where the entity's underlying control is held by offshore persons.

Therefore for your average resident New Zealander selling their main home, the RLWT will not be an issue as the bright-line test will not apply to them.

But don't think the resident New Zealander can get around the rules by selling their 'main home' annually.  Even resident vendors will be subject to the bright-line test if they sell three 'main homes' within in a two-year period.

While RLWT will not need to be deducted because they are not an offshore person, a resident will still be liable for tax on the gain under the bright-line test and, as they are resident in New Zealand it is much easier for the Inland Revenue to come knocking on their door than it is for offshore persons no longer physically in the country.

Calculating the RLWT

So how much will the RLWT be?  It is proposed the RLWT will be the lower of 33% of the estimated gain on sale, or 10% of the purchase price, with vendors given the opportunity to file an interim tax return in some circumstances obtain a refund of the RLWT if applicable.

The Government should be commended on proposing a withholding mechanism on what are essentially property speculation gains.  Although I can understand applying the RLWT to offshore vendors given the almost impossibility of extracting New Zealand tax from a person no longer in the country, perhaps consideration should be given to applying the RLWT regime to all vendors, both offshore and resident, who find themselves taxable under the bright-line test.  To ensure the tax system operates fairly, this would surely be the most robust approach. 

The challenge for the Government will be in ensuring the mechanism for collecting the tax is sound, compliance costs are minimised and of course having the rules clearly understandable by all.

The Government is seeking feedback on the proposed RLWT regime, in particular who should undertake the withholding and how practically the process will work.  So if you have any views to put forth on this you only have until 2 October 2015 to get your feedback in.

For more information or assistance with your property transactions, please contact the Knowledge Shop Consultants on solutions@knowledgeshop.co.nz or the Tax Team direct.

Shelley-ann Brinkley
Associate - Tax Consulting
T +64 9 414 5444
E shelley-ann.brinkley@hayesknight.co.nz

Phil Barlow
Tax Director
T +64 9 414 5444
E phil.barlow@hayesknight.co.nz