The Income Tax Act 2007 (the ITA 2007) contains provisions that impose income tax on certain property transactions, and also on rental income earned from property. Current tax rules include provisions which tax gains from property bought with the intention of disposal and provisions which tax land acquired for the purposes of a business dealing in land. However, although the ITA 2007 creates these obligations, the Government is concerned that compliance with these provisions may be relatively low. This may come about as a result of ignorance of the tax rules. It is recognised that enforcing tax rules on non-residents is very difficult, especially those with only limited engagement with New Zealand.
In order to investigate compliance with the ITA 2007 provisions, Inland Revenue does have the capacity to access records of land transfers in New Zealand. But this process is historic, rather than in real-time. Information received might also not give a complete picture of the activities or identity of a particular taxpayer.
The fact that Inland Revenue is not aware of certain transactions means that the scope of the problem is not able to be quantified.
To address these concerns, the Government is introducing a suite of measures aimed at providing clearer rules and providing more useful information to Inland Revenue to assist in its enforcement of the rules, including increased funding to Inland Revenue to investigate property compliance.
This bill contains two of those measures, to come into force on 1 October 2015.
First, transferors and transferees will be required to provide their IRD numbers (and, if they are also resident in another jurisdiction for tax purposes, their equivalent of an IRD number from that foreign jurisdiction) at the time of transfer. This information will be provided to Land Information New Zealand (LINZ) as part of the transfer documentation and then forwarded to Inland Revenue. An important feature of the proposal to provide IRD numbers is that all parties to a land transaction will be expected to have an IRD number, even if they are non-resident. A person who is not an “offshore person” as defined and who is purchasing a property with the intention of that property becoming their main home, or selling a property that was their main home, will be exempt from the requirement to supply this information.
Second, an “offshore person” (as defined) will be required to provide evidence of a New Zealand bank account as a prerequisite to obtaining an IRD number. This is to ensure that an offshore person looking to obtain an IRD number has first been subjected to New Zealand’s anti-money laundering and Countering Financing of Terrorism rules.
A separate legislative change, not contained in this bill, is planned to introduce a “bright-line” test, which is to come into force on 1 October 2015. The bright-line test will, in general terms, make the disposal of residential property taxable if the property is bought and sold within two years (subject to certain exemptions, such as if the property was the person’s main home). An issues paper on the bright-line test was released at the end of June 2015.