Residential land withholding tax
The Government introduced the bright-line test for residential land sales on 1 October 2015. The bright-line test taxes the sale of residential land sold within two years of the taxpayer acquiring the property where the property does not qualify as a “main home”. At the same time, the Government also introduced a requirement for sellers and purchasers to complete tax statements as part of the land transfer system. The final part of the reforms intended to ensure property speculators cannot avoid their tax obligations is the introduction of a residential land withholding tax (RLWT) from 1 July 2016.
The application of RLWT
The RLWT regime requires a lawyer or conveyancing agent acting for an offshore person selling a residential property to withhold RLWT from the sale price and pay it to Inland Revenue. The obligation to withhold RLWT will arise when an offshore person sells a residential property that is subject to tax under the bright-line test; that is, the sale of the property is occurring within two years of the person acquiring it and it is not the person’s main home. When RLWT applies, the lawyer or conveyancing agent must withhold the lesser of 33% (or 28% for a company) of the seller’s gain on selling the property and 10% of the gross sale price. The lawyer or conveyancing agent is responsible for paying the RLWT to Inland Revenue. RLWT is an interim tax meaning a seller may file a tax return and obtain a refund where the RLWT withheld exceeds the seller’s final tax liability.
For RLWT to apply, the seller of the property must be an offshore person. Generally, an offshore person is a company, partnership or trust formed outside New Zealand, or an individual who is not a New Zealand citizen and does not hold a New Zealand residence visa. However, a New Zealand citizen who has not been in New Zealand within the last three years and a holder of a New Zealand residence visa who has not been in New Zealand within the last 12 months, are also offshore persons for the purposes of RLWT. New Zealand companies, partnerships and trusts with overseas connections could also find themselves subject to RLWT. New Zealand companies and partnerships where offshore persons exercise more than 25% control over the company or partnership may be offshore persons. A trust will be an offshore person if more than 25% of its trustees or appointors are offshore persons, or if all its beneficiaries are offshore persons. However, a trust can also be an offshore person when only one of it beneficiaries is an offshore person and certain criteria are satisfied.
Therefore, you should not assume that because you are a New Zealand citizen or resident, or a New Zealand formed company, partnership or trust that you will not be subject to RLWT. If you are living outside New Zealand or have directors, shareholders, partners, trustees, appointors or beneficiaries (as applicable) living outside New Zealand you may be an offshore person and tax may be required to be withheld from the proceeds of selling residential land that is subject to the bright-line test. The consequences of unexpectedly finding yourself subject to RLWT could be quite severe if you were expecting to have the funds available to settle the purchase of another property or meet some other obligation.
If you have any questions regarding the potential impact of RLWT on you, please contact your local Findex tax adviser.