Tax Time

Introduced with effect from 1 October 2015 was the capital gains tax which according to our Prime Minister was not a capital gains tax.

However you will be subject to tax in New Zealand if you sold a residential property in New Zealand, within 2 years of acquisition, that was not your “main home” regardless of the reason you bought the property.

taxes-646512_1280It is rather inappropriately called the ‘bright-line tax’ though there is little that could be called bright about a tax which has such limited application and for which there seems to be some confusion over who it is supposed to apply to.

Unitary Plan Tax

If you sell a property within 10 years of acquiring it and at least 20% of the increase in value is the result of changes or the likelihood of changes to the rules of an operative district plan the excess will be taxable. Although this provision has been in the Tax rules for some time, the changes to the Unitary Plan and the new disclosure requirements may well bring it back into focus by IRD. This provision will not apply if a person bought the property for a purpose of intending to use for residential purposes and sold it to someone who also acquired the property for those purposes

But wait there’s more…..

RLWT

With effect from 1 July 2016 a new land withholding tax was introduced (the Residential Land Withholding Tax “RLWT”).

How does the RLWT work?

It applies where the vendor is an offshore RLWT person and the sale is subject to the bright-line tax.

Who then or what then, you may ask is an offshore RLWT person?
Good question.

There is a whole new test which includes:

Individuals:

• A person who is a New Zealand citizen but has not been in New Zealand at any time in the last 3 years (yes a large chunk of our OEers);
• A person who holds a residence class visa and, who is outside New Zealand and who has not been in New Zealand within the last 12 months;
• A person who is not a New Zealand citizen and who holds no residence class visa.

Trusts, a trustee if:

• More than 25% of the trustees are offshore RLWT persons;
• More than 25% of the persons with the power to appoint or remove trustees or and the trust deed are offshore RLWT persons;
• All beneficiaries are offshore RLWT persons;
• The trust has a beneficiary that is an offshore RLWT person and has disposed of residential land at any time within the last 4 years;
• The trust has in 1 of the last 4 years, made a distribution totalling more than $5,000.00 to a beneficiary that is an offshore RLWT person.

In other words, for example, where a common garden family trust makes a distribution of the required amount to a discretionary beneficiary doing his/her OE in London, Sydney or wherever , the trust will be caught by the RLWT if it has bought and sold a residential property within 2 years.

A Company if:

• It is incorporated or registered outside New Zealand;
• It is constituted under foreign law;
• More than 25 % of the directors (or general partners in the case of a limited partnership) are offshore RLWT persons;
• More than 25% of the company’s shareholder decision making rights are held directly or indirectly by offshore RLWT persons

You think that’s a little complex? Consider this…..

brett_carpenterIf the vendor is “associated” with the purchaser then the purchaser, not the vendor, pays the RLWT. Yes that is what is required. Person A sells a property to person B and has made a profit which is subject to the bright-line tax. If person A and person B are associated for tax purposes, person B is required to pay part of the tax that person A is liable for. Anyone who thinks they might be in this position will need some pretty detailed (and expensive) tax advice.

Remember the whole purpose of the RLWT was to collect tax from non residents who the government decided were unlikely to pay otherwise.

Complex tests and what’s more the conveyancer (read your lawyer) will have to calculate then deduct the RLWT from the sale proceeds and pay it to the IRD.

Foreign Trusts

You will no doubt be aware of the fallout from a massive ‘leak’ of records from a Panamanian law firm, Mossack Fonseca which, among other things, brought into question the use of foreign trusts established in New Zealand.

The simple fact was/is that there are no requirements for foreign trusts to disclose anything. There is no register kept of such trusts.

The Prime Minister brushed off claims that New Zealand was a tax haven and that foreign trusts were being used by wealthy individuals to facilitate:

• Tax evasion;
• Aggressive tax planning; and
• Money laundering and hiding of assets.

However, a report was commissioned from John Shewan a well known accountant and company director with considerable experience in tax policy and practice among other activities, to examine New Zealand’s foreign trust disclosure rules. His inquiry concluded:

The Inquiry concludes that the existing foreign trust disclosure rules are inadequate. The rules are not fit for purpose in the context of preserving New Zealand’s reputation as a country that cooperates with other jurisdictions to counter money laundering and aggressive tax practices. It also reported that under current law and enforcement practices the risk of detection by authorities is low.

The end result is likely to be, once legislation has been passed, that foreign trusts will be required to register with IRD and disclose the names and addresses of settlors, trustees and certain beneficiaries. The tax treatment of foreign trusts is likely to remain unchanged.

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