New tax type: residential land withholding tax
(Clauses 35, 36, 38, 39, 41, 42, 43, 44, 45, 72 and 73)
Summary of proposed amendment
The bill proposes a new refundable and creditable tax called residential land withholding tax (RLWT).
Key features
New section RA 6C of the Income Tax Act 2007 provides that a person required to pay RLWT under new section RL 2 and a person required to withhold and pay RLWT under new section RL 3, must pay RLWT to the Commissioner of Inland Revenue by the due date.
The RLWT rules are set out in new subpart RL. RLWT will apply to certain disposals of residential property.
RLWT will be, in effect, a new type of withholding tax. It will only be a true withholding tax if the vendor and purchaser are associated persons. This situation is specified in new sections BE 1(6) and RL 3. In other cases, the person required to pay RLWT on behalf of the vendor (the paying agent) will be able to retain the amount of RLWT from the purchase price to be paid to the vendor, similar to a withholding tax, but RLWT will instead be listed in section BF 1 (and in section YA 1 as an ancillary tax). The ability to retain an amount of RLWT from the purchase price is provided for in new section RL 2(7).
This distinction is necessary because, in general, the RLWT paying agent will not be liable for the underlying amount of RLWT. The exception to this general rule is when the vendor and purchaser are associated persons. In this case, the purchaser may be liable for the underlying amount of RLWT. The section titled “Person required to pay RLWT (the paying agent and the withholding agent)” provides further discussion on this issue.
When the obligation arises
The obligation to retain/withhold and pay RLWT is intended to arise upon settlement when, in most cases, the bulk of the purchase price will be paid by the purchaser to the vendor via a conveyancing agent. At this point the RLWT paying or withholding agent should retain or withhold RLWT from the funds being paid. Further information about who will be the paying agent or withholding agent can be found in the section titled “Person required to pay RLWT (the paying agent and the withholding agent)”.
New section RL 1 provides that in general, the obligation to pay RLWT will arise if there is a “residential land purchase amount” and the conditions for withholding are satisfied. The section titled “When RLWT applies” discusses when RLWT will apply.
The definition of “residential land purchase amount” proposed in section YA 1 means an amount paid or payable for the disposal of the residential land in question, but excludes deposits and part-payments as long as all deposits and part-payments total in aggregate less than 50 percent of the purchase price for the land. This rolling aggregate is to ensure that part-payments are not used to circumvent the application of the RLWT.
Example
Elizabeth agrees to sell her house to Rebecca for $500,000. The contract requires Rebecca to pay a 10 percent deposit of $50,000, with the remaining $450,000 to be paid upon settlement. The $50,000 deposit is not a residential land purchase amount, but the $450,000 paid upon settlement is a residential land purchase amount.
Due dates for RLWT to be paid to the Commissioner
Once the obligation for RLWT has arisen and the appropriate amount of RLWT has been withheld or retained from a residential land purchase amount, new section RL 5 and an amendment to section RA 15 provide that the standard due dates for interim and other tax payments made on a monthly basis will apply. The due date is specified in section RA 15(2) as being the 20th day of the following month.
This will provide for the “batching” of various RLWT amounts, which may be preferable for a paying or withholding agent who handles a number of RLWT transactions in a month. Paying or withholding agents will also be allowed to pay RLWT amounts to the Commissioner on a transaction-by-transaction basis before the due date stipulated in section RA 15.
The transaction-by-transaction approach may be preferred by conveyancing agents who handle RLWT transactions on occasion, and by vendors who want to square up the amount of RLWT paid with their income tax liability in relation to the disposal of the residential land fairly soon after its disposal.
Example
Susanna is a conveyancer and retains RLWT from four transactions during the month of March. Susanna pays the retained RLWT amounts to the Commissioner on the stated due date, 20 April.
Example
Bill is a conveyancer who normally pays RLWT amounts to the Commissioner on the 20th of the following month. However, for a particular transaction, Bill agrees with his client to pay the amount RLWT to the Commissioner immediately.
Example
Scott is a solicitor who only occasionally handles RLWT transactions and prefers not to hold onto the retained funds. Scott retains RLWT from a residential land payment amount on 1 August. He is not required to pay this amount to the Commissioner until 20 September, but chooses to pay the RLWT amount to the Commissioner the following week.
Tax credit for RLWT paid
Under a proposed amendment to section LA 6 and new section LB 6B, a person will have a tax credit for a tax year equal to the amount of RLWT paid in relation to residential land they have disposed of.
It is expected that a credit under new section LB 6B will be used primarily to offset the person’s income tax liability from the disposal of residential property.
To the extent that the amount of RLWT paid exceeds their income tax liability in relation to the disposal of the residential property, a proposed amendment to section LA 6 provides that the RLWT credit can be used to satisfy the person’s other income tax liabilities.
If the person has no other income tax liabilities, the excess RLWT may be refunded.
Example
Patrick sold his residential property and $40,000 of RLWT was withheld from the settlement amount. Patrick’s income tax liability in relation to the disposal is only $35,000. Patrick has no other tax liabilities. Inland Revenue issues a refund to Patrick of $5,000.
A person will be able to file an interim income tax return before the end of an income year, returning their taxable income arising from the disposal of residential land, in order to obtain a refund of excess RLWT. This return will not be considered final until the end of the income year.
RLWT will need to be paid to the Commissioner before a refund will be issued as part of an interim income tax return.
There is the possibility that a person’s tax liability in relation to the disposal of residential land will arise in one tax year, but the RLWT will not be collected until the following tax year due to the timing of a property settlement. The proposed addition of RLWT to section LA 6 ensures that a person’s RLWT credit may be used for earlier tax years.
RLWT must be paid before other disbursements
RLWT must be paid before other disbursements made as part of the settlement process – for example, mortgages. This is so RLWT cannot be easily circumvented by gearing up before disposal of the residential property.
Sometimes, the payment of RLWT before other disbursements may leave insufficient funds for the vendor’s mortgage obligation to be discharged.
New section RL 4(6) provides that the amount of RLWT payable by the vendor’s conveyancing agent will be reduced to the extent required to discharge a mortgage obligation held with a New Zealand-registered bank or non-bank deposit taker licensed under the Non-bank Deposit Takers Act 2013. Further information can be found in the sections titled “Calculating RLWT” and “Person required to pay RLWT (the paying agent and the withholding agent)”.
Officials will monitor the situation to ensure that this provision is not used to undermine the integrity of the RLWT and the broader tax system.
Non-fulfilment of RLWT obligations
This is discussed in further detail in the section titled “When RLWT obligations are not met”.