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The 2015 Budget saw the introduction of proposals to “improve compliance in the property investment sector.” Under the new rules, from 1st October 2015, transferors and transferees of land will be required to provide certain tax information at the time of the land transfer, with registration of the transfer not being able to proceed until both parties have either provided the information or confirmed their exemption from the new requirements. A new “bright-line” test will also be introduced to assist with the application of the existing “intention” laws, which levies income tax on gains arising from a disposal of land which has been acquired with a purpose or intention of resale. Finally it is proposed that a withholding tax will be introduced from 1st July 2016 to ensure compliance by offshore persons with the new bright-line rules.
Disclosure of tax information
If you are an offshore person (defined below), then any transfer of land post 1st October 2015 (unless the contract was entered into pre 1st October 2015 and the transfer is registered by 1st April 2016), will require you to provide both a NZ IRD number, and the name of the tax jurisdiction you are tax resident in at the time of transfer, along with the equivalent of an IRD number for that jurisdiction. If you do not already have a NZ IRD number, under the new rules you will require a fully functional NZ bank account in order to obtain a NZ IRD number.
An individual is not an offshore person if they are a NZ citizen and have been in NZ within the past 3 years, or they hold a NZ residency class visa and have been in NZ within the past 12 months.
A non-individual is not an offshore person provided the entity is not incorporated outside of NZ, or 25 percent or more of the entity is not owned (legal or beneficial) or controlled by an offshore person.
If you are not an offshore person, and the property is either intended to be your main home (acquiring) or was your main home (selling), then you will not be required to provide the tax information unless your ownership vehicle is/was a trust or this is the third time you have sold your main home within a two year period. The “main home” concept is discussed further under the bright-line section.
Besides the requirement to supply an IRD number, you will also be required to advise whether the land has a home on it, whether you or a member of your immediate family is a New Zealand citizen or visa-holder and if you are the buyer, whether you or your immediate family has a work or student visa, and intend living on the land.
The legislation provides for the automatic exemption of certain parties from the new requirements where the Minister for Land Information deems it appropriate to do so. Presently automatic exemption is provided for in respect to mortgagees in mortgagee sales, executors of a person’s estate and tax-exempt public and local authorities.
Current income tax legislation already contains an “intention test” which imposes taxation on any disposal of land by a taxpayer where the land was acquired with an intention or purpose of disposal, which does not have to be the sole intention or purpose in respect of the land (subject to application of any available exemption).
The rules rely on a subjective test presently, which creates some difficulties for the Revenue in trying to establish what the taxpayers intention or purpose was when the land in question was acquired. However the taxing provisions are already in existence and consequently it calls into question whether the new “bright-line” test is simply a Government trying to be seen to do something for its voters in respect of Auckland’s well publicised over-heated property market, or whether the new rules actually have some merit as a mechanism to change an existing subjective intention test to an objective one and will therefore catch possible previous non-compliance with the existing law.
Where land is acquired post 1st October 2015 and is then sold within two years, unless one of the prescribed exemptions applies, any gain on disposal will be taxable. The gain will effectively be calculated as sale price less allowable deductions, which will include the original acquisition cost plus any capital improvement costs incurred during the period of ownership. Any loss arising as a result of application of the bright-line rule will be ring-fenced, only available for offset against any future profits which occur as a result of the application of any of the land taxing provisions (not just the bright-line rules).
One of the key points to understand is that often the purchaser’s acquisition date will be different to the vendor’s disposal date. The acquisition date for the purchaser will usually be the date the title transfer is registered. The disposal date for the vendor however will usually be the date the vendor enters into an agreement with the purchaser. It should be noted that there are additional rules to deal with sales “off the plans”.
The bright-line test will only apply to disposals of residential land (not restricted to NZ land), which includes in the definition land that has a dwelling on it, is land where the seller is party to an arrangement to erect a dwelling on the land or, and probably the most contentious issue, bare land that because of its area and nature is capable of having a dwelling erected upon it.
The prescribed exemptions are where the land was the seller’s main home (subject to exceptions), the land was inherited by the seller from a deceased estate or the land has been transferred to the seller as part of a relationship property settlement.
In order to qualify as a main home, the land must have been used predominantly, for most of the time the person owns the land, as the person’s main home. The test is one of actual use and not of intended use, and refers to the use by the owner of the land and not a family member for example.
The exemption can also apply in situations where a trust owns the land in respect of a beneficiary who resides in the property as their main home. There is an exception in this respect however and one that could potentially create issues for uninformed parties. Where the principal settlor (one that has settled the most property) of the trust also owns a main home, the trustees will not be able to claim the main home exemption in respect of a property lived in by a beneficiary as their main home. The consequence of this proviso to the exemption, is that often the settlor of the trust is a parent who has established the trust for their adult children, those children often being the trustees of the trust who have used the structure to acquire their family home, where if they sell that family home within the defined two year period, will be subject to paying tax on the disposal under the bright-line rule.
If a person has more than one home, then a “greatest connection” test on an objective basis will apply to determine the person’s main home.
The bright-line legislation has not been passed into law as at the date of this article, having only passed through its first reading in the House on 9th September 2015. The draft Bill is expected to proceed however without any significant further changes and will be effective from 1st October 2015.
Finally it should be noted that there are no changes to the existing “intention” laws, so just because a disposal of land does not occur within the defined bright-line period, does not necessary mean any gain arising upon sale is now exempt from taxation.
Residential Land Withholding Tax
Submissions have just closed on proposals to introduce a residential property withholding tax to align with the new bright-line rules, which is expected to apply from 1st July 2016.
The withholding tax would apply in respect of disposals of residential land by an “offshore person”. The rate of tax would be the lesser of 33% of the vendors gain on the property or 10% of the total purchase price of the property. Note that “gain” in this regard will not be the same as the gain computed under the bright-line rules, the deductions permitted in this instance being a lot more restrictive.
At this stage it is suggested that the withholding agent would be the purchaser’s agent for the relevant transaction, and they are perceived to be in the best position to ensure the correct amount was deducted as required and paid to the Revenue.
It is proposed that the withholding tax would not be a final withholding tax, unlike several of our other non-resident withholding taxes. It is expected that the offshore person may wish to file an income tax return where excess tax has been deducted because the withholding agent could not obtain the requisite information to compute the vendor’s gain at the time the withholding tax deduction was required to be made, and therefore the envisaged higher amount of 10% of the purchase price of the property was deducted instead.
We will provide further commentary on the proposed residential land withholding tax rules, once the Bill containing the new rules is released, along with any further commentary with respect to the bright-line test once that legislation has passed into law.
It will be some time before we will be able to measure the effectiveness of the latest round of tax changes, however it will only be a matter of time before we will be able to see for ourselves whether political merit points was the aim of the day as opposed to introducing good tax policy.
Should you wish to discuss any of the proposed changes, please contact your advisor.