RLWT….WTF??

Thought you were all over the recent tax changes arising from the introduction of the bright line tax (aka capital gains tax)?

Then consider this:

Debbie is an English citizen but has permanent residence in New Zealand. She has just completed a science degree (IT).

Max is a South African citizen and has a work visa in New Zealand but no residence class visa.

They bought a house together about 12 months ago and have lived in it together since then.

Debbie has agreed to buy Max’s share of the house so that he can start a new business.

The bright line tax introduced in 2015 provides that a person who buys and sells a residential dwelling within 2 years is liable for tax on the profit. There is an exemption when the dwelling was used as a ‘main home’ by the owners. So you would not expect there to be any tax payable in this scenario.

However, because Max is regarded as an ‘offshore person’ for the purposes of these rules, he is not entitled to the exemption and will be taxed on the increase in value of his share of the property.

As an offshore ‘RLWT person’ Max will be liable for Residential Land Withholding Tax. This means that his conveyancers (lawyers) will have to calculate and deduct ‘Residential Land Withholding Tax’ from the ‘profit’ (being the difference between the purchase price & sale price) and pay it to the IRD.

Now it gets really really stupid. Because Max and Debbie are ‘associated persons’ the new rules specify that Debbie not Max must pay the withholding tax, and the legal obligation is on Debbie’s lawyer to withhold and pay the tax to the IRD.

Original cost of house        450,000.00
Debbie (60%)                      240,000.00
Max (40%)                            180,000.00
Value 12mnths later            510,000.00
Debbie share                       306,000.00
Max share                             204,000.00
Profit earned by Max            24,000.00
RLWT payable by Debbie     $7,920.00

Remember also:

• a New Zealand citizen who has not been in New Zealand for the last 3 years is included in the definition of offshore RLWT person.

• an ordinary family trust (of which there are countless in New Zealand) which has amongst its beneficiaries someone doing their OE after finishing uni becomes an offshore RLWT person if the trust has made a distribution of at least $5,000.00 to that beneficiary in the last 4 years.

• If that trust sells a residential property within 2 years of acquisition it may be subject to both the bright line tax on any profit from that sale and RLWT.

You can read more from QCL Tax Specialist Brett Carpenter in regards to RLWT here and here.

Disclaimer:
We have taken care to ensure that the information given is accurate, however it is intended for general guidance only and it should not be relied upon in individual cases. Professional advice should always be sought before any decision or action is taken.

Please feel free to contact us for any further information.

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