Chapter 3 - The withholding agent
- Who should have the withholding obligation?
- Primary obligation on the purchaser’s conveyancing agent
- Obligation on the vendor’s conveyancing agent
- Compliance burden
- No conveyancing agent
3.1 In this chapter we discuss who should be responsible for withholding RLWT.
3.2 As noted in the previous chapter, we suggest that withholding obligations under the RLWT should be effective from 1 July 2016.
3.3 In this and subsequent chapters, we use the term “conveyancing agent” to refer to conveyancers and solicitors involved in the property transaction (particularly in relation to the settlement and title transfer processes).
Who should have the withholding obligation?
3.4 The tax system aims to minimise the compliance burden it places on taxpayers. Therefore, as a starting point we propose that the withholding obligation fall on the conveyancing agent involved in the property transaction – rather than the vendor or purchaser themselves. That is, the conveyancing agent involved in the property transaction should be the RLWT withholding agent. This is because they already have professional obligations to discharge in relation to the conveyance of property and this would more naturally form part of those other obligations. They also have the systems and trust accounts needed to manage the funds involved in the settlement of property which is important in terms of ensuring the integrity of the withholding process.
Officials appreciate that requiring conveyancing agents to withhold RLWT would impose compliance costs and require changes to systems and processes. We are interested in receiving feedback on the compliance-cost aspect of the RLWT proposed in this issues paper.
3.5 Placing the obligation on the purchaser would be very difficult both in terms of compliance and administration. Placing the obligation on the vendor does not make sense because it would defeat the purpose of ensuring the RLWT is paid as part of the settlement process. Moreover, the vendor is already liable for income tax on the sale of the property – regardless of whether or not RLWT is withheld.[3]
3.6 The next question is which conveyancing agent should have the primary responsibility to withhold the tax – the vendor’s or the purchaser’s? There are advantages and disadvantages to either approach, which we have outlined below.
We would like submitters to consider whether the primary obligation to withhold RLWT should lie with the purchaser’s conveyancing agent, or the vendor’s conveyancing agent.
Primary obligation on the purchaser’s conveyancing agent
3.7 There are some advantages in requiring the purchaser’s conveyancing agent to be the withholding agent.
3.8 In general, withholding taxes are used to ensure that the relevant tax is paid out of an amount due to a person before the recipient gets control of the funds. The recipient may have an incentive to spend the funds before tax has been paid, which is generally why tax administrations “clip the ticket” before the money reaches the recipient. In finding an appropriate party to clip the ticket, we consider it should be the person with the least to gain from failing to comply with the rules - this is normally the payer of the amount. This is particularly relevant to the problem here, as this withholding tax is aimed at enforcing the vendor’s tax liability under the bright-line test.
3.9 New Zealand’s withholding tax regimes commonly require the payer of an amount to withhold a portion from that payment and pay it to the Commissioner. Generally, the amounts of tax withheld are on account of the recipient of the payment. For example, when an employer withholds PAYE from an employee’s salary or wages, it is on account of the employee. With interest payments, the payer (e.g. a bank) is required to withhold NRWT and RWT from a payment of interest, but the NRWT and RWT relate to the payee’s tax liability.
3.10 This “payer as withholding agent” approach is the international norm for withholding taxes more generally, as well as for withholding taxes on sales of residential property. Under the withholding regime in relation to sales of real property in Canada, Japan and the United States, the primary liability to withhold is imposed on the purchaser (normally via their solicitor). In addition, Australia has recently proposed to introduce a withholding tax on sales of residential property to supplement its capital gains tax, where the primary liability to withhold would also be on the purchaser.
3.11 While the aforementioned countries place the legal obligation on the purchaser, it is expected that the purchaser will use an agent (a solicitor or conveyancer, for example) to handle their affairs.
3.12 Note that in the case of Canada, while the primary withholding obligation is on the purchaser, the obligation only arises if the seller cannot provide the purchaser with a “certificate of compliance”. We understand that the seller is generally required to notify the Canadian Revenue Authority in advance of the property sale and square up their tax liability in relation to the property sale before a certificate of compliance is issued. Effectively, this means that withholding is only required in Canada if a non-resident has not fulfilled their tax obligations in relation to the property sale.
3.13 Another advantage of placing the primary obligation to withhold on the purchaser’s conveyancing agent is that the funds are likely to flow through a New Zealand solicitor’s trust account and so there would be funds in New Zealand from which RLWT can be withheld.
3.14 As a back-up, this approach allows a secondary obligation to withhold to be imposed on the vendor’s conveyancing agent. Having a “back stop” would be useful in the case of any misunderstanding between the two parties or if either the vendor or their conveyancing agent knows or discovers that the purchaser’s conveyancing agent failed to withhold or has withheld the incorrect amount. That is, the vendor’s conveyancing agent would be obliged to withhold RLWT and pay it to the Commissioner, if they know from the settlement statement and from the amount received on settlement that the purchaser’s conveyancing agent did not withhold RLWT or withheld insufficient RLWT. In the latter case, the vendor’s conveyancing agent would be obliged to withhold the difference. This could be streamlined by including an “RLWT calculation worksheet” in the conveyancing process and settlement statement.
3.15 There are also disadvantages in placing the primary obligation on the purchaser’s conveyancer.
3.16 The ultimate tax liability arising under the bright-line test belongs to the seller, not the buyer. Accordingly, it may be perceived as unfair to impose the compliance burden of the withholding on the purchaser and their agent. We note the compliance costs may or may not be economically borne by the buyer, depending on the price that buyers are willing to pay for a property.
3.17 A further difficulty with placing the primary obligation for withholding on the purchaser’s conveyancing agent would be that that conveyancing agent would need to decide whether or not withholding is required on any given transaction.
3.18 In order to address that difficulty, RLWT could apply unless one of two exceptions is available. In determining whether one of the exceptions is available it is proposed that the purchaser’s conveyancing agent would be able to rely on:
- information supplied by the conveyancer for the vendor; and
- information contained in the databases established by Quotable Value or Landonline.
3.19 In summary, these are the main advantages and disadvantages we have identified in placing the primary obligation on the purchaser’s conveyancing agent:
| Primary obligation to withhold RLWT on the purchaser’s conveyancing agent | |
|---|---|
| Advantages | Disadvantages |
|
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Obligation on the vendor’s conveyancing agent
3.20 The other option is to place the obligation to withhold on the vendor’s conveyancing agent.
3.21 Under this approach, the compliance burden and costs would be legally borne by the vendor. This could be seen as being fairer because the vendor is the person with the ultimate tax liability.
3.22 In addition, the vendor’s conveyancing agent is likely to be familiar with their client’s personal situation. This means the conveyancing agent will be in a position where they have more immediate access to information about the vendor’s offshore status. In terms of the information that a withholding agent would need to collect in order to determine whether RLWT should be withheld (and at what rate), we think that determining whether the vendor is an offshore person would be the most resource intensive part of the process.
3.23 Another advantage is that the vendor’s solicitor is generally responsible for paying the vendor’s other expenses relating to the property sale out of the funds received upon settlement, before releasing the net amount to the vendor. This includes the payment of the seller’s mortgage on the property and costs apportioned between the purchaser and vendor (e.g. rates and other levies relating to the property). As the vendor’s solicitor already deals with these other expenses, it may be straightforward for them to also withhold and pay the RLWT to the Commissioner.
3.24 In contrast to placing the primary obligation on the purchaser’s conveyancing agent, one disadvantage of this approach is that it is contrary to international norms and is contrary to New Zealand’s current withholding tax regimes, where the withholding liabilities are imposed on the payer. The liability to withhold is generally placed on the payer because they are seen as the party to the transaction with the least incentive to not comply with the rules.
3.25 We understand that while a New Zealand conveyancing agent is required to undertake the title transfer process in Landonline, they may not be involved in the funds transfer process. As the vendor is an offshore person, there is the possibility that their solicitor is not based in New Zealand. If the New Zealand conveyancer is not involved in the funds transfer process, there are no funds from which the New Zealand conveyancer can withhold the required amount of RLWT. If the vendor uses a foreign solicitor, it may be more difficult to impose and enforce withholding obligations on that foreign solicitor. In addition, the funds may not go through a bank account controlled by a New Zealand conveyancing agent. If this is the case, a solution to this problem would need to be found.
3.26 Another disadvantage in placing the liability on the vendor’s conveyancing agent is that it would effectively place the sole responsibility for withholding on the vendor’s conveyancing agent. This is because the vendor’s conveyancing agent is the final “link in the chain” before the funds reach the vendor’s hands and so there would be no further opportunity to impose a secondary withholding liability if the vendor’s conveyancing agent fails to withhold RLWT.
3.27 In summary, these are the main advantages and disadvantages we have identified in placing the primary obligation on the vendor’s conveyancing agent:
| Obligation to withhold RLWT on the vendor’s conveyancing agent | |
|---|---|
| Advantages | Disadvantages |
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Compliance burden
3.28 In terms of the compliance burden, we do not consider there to be a significant difference between placing the obligation to withhold RLWT on the purchaser’s or the vendor’s conveyancing agent. One point to note is that the compliance burden is not necessarily borne by the party who is legally required to undertake the withholding. For example, where the withholding obligation is on the vendor’s conveyancing agent, the vendor could pass the compliance cost onto the purchaser by requiring a higher sales price.
No conveyancing agent
3.29 There may be situations where a sale of residential land does not involve a conveyancing agent.
3.30 Where there is no conveyancing agent involved in the transaction, we propose that the primary withholding obligation falls on the purchaser. A secondary obligation could also be imposed on any agent or other person in New Zealand who receives payment on behalf of the vendor, similar to the obligation in section RF 4 of the Income Tax Act 2007 in relation to non-resident passive income.
[3] There is no “double taxation” because RLWT may be claimed as a credit by the vendor when the vendor files an income tax return.