Update on Residential Land Tax

Where to start?

The new data collection requirements and ‘bright line test’ have now been in place for a few months.

The new Bright Line Tax applies to all residential property with a house on it in the following instances:

• It is acquired after 1 October 2015 and sold within 2 years of acquisition; and
• The owner does not occupy the house as a main residence.
• The new rules also apply to land bought and sold outside New Zealand.

What is the bright line test?property tax

The bright line test applies a capital gains tax on the profit made in the circumstances described above. Tax will be assessed on the net gain (sale price less purchase price and any deductible expenses) at the tax rate applicable to the property owner. It applies regardless of the intentions of the property owner at the time the property was acquired.

There is an exclusion from liability for the tax where:

The land has been used predominantly for most of the time the person owns the land for a dwelling that was the main home of the owner. (gotta love the lack of specifics in that sentence, but that’s our tax law for you!)

There are also special rules applying to inherited land and relationship property transfers.

What does it all mean if?

   I am a trustee?

You will not be subject to the tax if the person owning the land is a trustee of a trust and the property is occupied by a beneficiary of the trust and the principal settlor of the trust does not have a main home or it is the main home of the person which is being disposed of.

  I am a non-resident?

You will be subject to the tax because you won’t be using the property as your main home. Note that non-resident for the purposes of this rule includes a New Zealand citizen who has not been in New Zealand at any time in the previous 3 years.

  I am a company?

A company will be subject to the bright-line tax. The main home exemption will not be available. In some circumstance the transfer of shares in a company which owns a residential property will be subject to the tax.

  I am a property dealer/developer?

The bright line test only applies if none of the existing tax rules apply so you will be taxed if you are or would be subject to tax under the current rules.

  I bought a property for rental investment?

The purpose for which you buy a residential property is not taken into account when applying the bright line test. It is a capital gains tax pure and simple. You will be taxed if you buy and sell within 2 years.

The bright-line test will not apply to business premises or farm land.

Withholding tax

Pursuant to recent legislation a withholding tax regime will apply from 1 July 2016.

It’s primary purpose is to collect tax (called Residential Land Withholding Tax) from non resident property owners who are subject to the bright-line tax out lined above.

QCL tax teamUnder a new definition, an “offshore RLWT person” includes:

• A New Zealand citizen if they have not been in New Zealand within the last 3 years;

• A person holding a residence class visa if they have not been in New Zealand within the last 12 months;

• Anyone who is not a New Zealand citizen and who doesn’t hold a residence class visa;

• A trustee of a trust if
– more than 25% of the trustees are ‘offshore RLWT persons’;
– more than 25% of the people holding power to appoint or remove trustees or to amend the deed are ‘offshore RLWT persons’;
– all natural discretionary beneficiaries are ‘offshore RLWT persons’;
– all discretionary beneficiaries are ‘offshore RLWT persons’;
– a beneficiary that is an ‘offshore RLWT person’ has received a distribution from the trust of more than $5,000.00 in any 1 of the last 4 years prior to the disposal of residential land;
– the trust has a beneficiary who is an ‘offshore RLWT person’ and has disposed of other residential land within 4 years of the disposal of residential land;

• a company registered outside New Zealand;

• a company where more than 25% of the company’s directors are ‘offshore RLWT persons’;

• a company where more than 25% of the shareholder decision-making rights are held directly or indirectly by ‘offshore RLWT persons’

• similar rules apply to ‘look through companies’ and limited partnerships.

What rate is the RLWT?

The tax collected will be the lowest of the following:
i. 0.10 x (sale price – purchase price);
ii. 0.33 x current purchase price;
iii. Current purchase price – mortgage amount – outstanding rates

There is no provision for deduction of any costs in calculating the amount of the RLWT. The tax payer will receive a credit for the RLWT paid when the bright line tax is calculated.

Examples

Original purchase price $800,000
Sale price $900,000
Mortgage $400,000
Outstanding rates at sale $3,500

Tax calculated using the 3 formulas

i. 0.10 x (900,000 – 800,000) = $10,000
ii. 0.33 x 900,000 = $300,000
iii. 900,000 – 400,000 – 3,500 = $496,500

Who collects the tax?

Although the vendor is primarily liable to pay the tax, the tax will be collected and paid to IRD by the property sellers conveyancing lawyer from the proceeds of sale of the property.

However, if the vendor and purchaser are associated persons the purchaser rather than the vendor is obliged to pay the RLWT. The definition of ‘associated persons’ in the Income Tax Act is not a simple concept.

If you need further explanation please contact Brett Carpenter or Melinda Li.

You can read more about the Bright Line Test here.