Chapter 1 - Introduction
1.1 As part of Budget 2015, the Government announced that it would introduce a “bright-line” test for the sale of residential property. An officials’ issues paper on the bright-line test was released in June 2015 for consultation. Draft legislation for the bright-line test was introduced in August and is expected to apply from 1 October 2015 to the sale of certain property acquired after that date.
1.2 The bright-line test will require income tax to be paid on any gains from the sale of most residential property that is bought and sold within two years, with the exception of the main family home. The purpose of the bright-line test is to supplement the “intention test” in the current land sale rules. The intention test taxes gains from the sale of real property purchased with an intention of disposal.
1.3 For the bright-line test to be effective, the Government needs to have an appropriate administrative mechanism for collecting the tax – particularly when the vendor of the property is not in New Zealand.
1.4 New Zealand imposes withholding taxes on certain types of New Zealand-sourced income earned by foreign investors – we impose withholding taxes on dividends, interest and royalties (known as non-resident passive income).
1.5 This issues paper suggests that a withholding tax be introduced on sales of residential property from 1 July 2016 where the vendor is a foreign investor (defined as an “offshore person” as in the Taxation (Land Information and Offshore Persons Information) Bill) who has owned the property for less than two years prior to the sale. This issues paper discusses the design of a withholding tax that would be consistent with the proposed bright-line test.
1.6 Officials are interested in feedback on the suggestions outlined in this paper, particularly in relation to who should be required to undertake the withholding and how the process may work in practice.
How to make a submission
1.7 Officials invite submissions on the suggested changes and points raised in this issues paper. Submissions should be addressed to:
Residential land withholding tax
C/- Deputy Commissioner, Policy and Strategy
Inland Revenue Department
PO Box 2198
Wellington 6140
1.8 Or email [email protected] with “Residential land withholding tax” in the subject line. Electronic submissions are encouraged. The closing date for submissions is 2 October 2015.
1.9 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for Inland Revenue and Treasury officials to contact those making the submission to discuss the points raised, if required.
1.10 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this.
Summary of proposal
The proposal in this issues paper is to introduce a requirement for an amount to be withheld on the sale of residential land in New Zealand by a conveyancer or solicitor to the property transaction and paid to the Commissioner of Inland Revenue (“the Commissioner”). The amount to be withheld would be the lower of:
- 33% of the vendor’s gain on that property (i.e. 33% x (agreed total sales price - vendor’s acquisition price)); and
- 10% of the total purchase price of that property.
This proposed “residential land withholding tax” or “RLWT” would come into effect from 1 July 2016. That is, conveyancers and solicitors would be required to act as withholding agents and withhold RLWT on affected transactions where settlement occurs on or after 1 July 2016.
As the proposed RLWT is intended to be a mechanism for supporting the collection of tax imposed under the bright-line test, we suggest that the withholding tax apply where the vendor of the residential property is both an “offshore person” and taxable under the bright-line test, because they have held the property for less than two years prior to the sale.
Note that while the proposed bright-line test would apply to residential land regardless of the geographic location, we suggest that the RLWT be restricted to residential land in New Zealand.
Under the proposed RLWT, a conveyancer or solicitor involved in the transaction would be required to withhold and pay the required amount to the Commissioner, unless one of the following circumstances applies:
1. The vendor is not an offshore person.
2. The sale of the property would not be taxable for the vendor under the proposed bright-line test because:
a. the vendor acquired the property being sold before 1 October 2015; or
b. the vendor acquired the property being sold after 1 October 2015, but the vendor has owned the property for two or more years.
The withholding agent should be entitled to rely on the statement provided by the vendor, unless they know it to be false. In such a case, the withholding agent would be required to withhold and pay RLWT to the Commissioner. A useful precedent for this approach is in section 78F of the Goods and Services Tax Act 1985 which permits a supplier to rely on a statement made by the purchaser that the conditions for zero rating the supply have been met.
The RLWT should be withheld before any other amounts are disbursed in relation to the sale of the property.
The proposed RLWT is not a final withholding tax. We propose that the vendor should be able to claim a tax credit for the amount of RLWT withheld and paid to the Commissioner against their final income tax liability in relation to the sale of the residential property. In some cases this may result in a tax refund.
Summary of different parties’ obligations
Vendor
- Provide certified evidence showing whether they are or are not an offshore person (e.g. in the case of individuals, a copy of their passport, residence class visa and a statement that they have been physically present in New Zealand for the requisite period).
- Provide a certified copy of the vendor’s sale and purchase agreement from the time of acquisition, if the vendor’s title to the property being sold was registered on or after 1 October 2015, but the agreement for sale and purchase was entered into before 1 October 2015.
Withholding agent (either the purchaser’s or vendor’s conveyancing agent)
- Register as an RLWT withholding agent with the Commissioner.
- Confirm whether the vendor is eligible for an exception from withholding (i.e. not an offshore person or the residential property falls out of scope of the two-year bright-line test).
- Obtain the vendor’s acquisition price to calculate whether the standard withholding rate or default withholding rate applies.
- Withhold the correct amount of RLWT at the time of settlement.
- Pay the withheld amount of RLWT to the Commissioner.
- Provide the required information in a form approved by the Commissioner at the time of payment to the Commissioner.
Purchaser (where there is no conveyancing agent)
- Verify whether the vendor is eligible for an exception from withholding (i.e. not an offshore person or the residential property falls out of scope of the two-year bright-line test).
- Verify the vendor’s acquisition price to calculate whether the standard withholding rate or default withholding rate applies.
- Withhold the correct amount of RLWT at the time of settlement.
- Pay the withheld amount of RLWT to the Commissioner.
- Provide the required information in a form approved by the Commissioner at the time of payment to the Commissioner