Chapter 4 - The rate of RLWT


4.1 We propose that the rate of RLWT to be withheld would be the lower of:

  • 33% of the vendor’s gain (the “standard RLWT rate”); and
  • 10% of the purchase price of the property (the “default RLWT rate”).

4.2 The “lower of” approach suggested in this chapter allows the withholding agent to undertake a simple calculation based on publicly-available information and other information available to both parties, while also minimising the level of necessary contact between the solicitors or conveyancers for the purchaser and vendor.

4.3 We suggest that this “lower of” approach strikes a balance between creating a collection mechanism that approximates the amount of tax payable under the bright-line test and making the process straightforward for the withholding agent.

The standard RLWT rate

4.4 We consider that the standard RLWT rate should generally apply to calculate the RLWT obligation – except in rare cases where it is not possible to apply or it results in more RLWT being withheld than the default rate (see below). The standard RLWT rate would be calculated as:

RLWT = 33% x (total purchase price - vendor’s acquisition price)

4.5 In other words, the standard RLWT rate calculates the vendor’s gain based on the total purchase price agreed between the purchaser and the vendor less the cost at which the vendor acquired the property. The top marginal tax rate of 33% is then applied to the gain.[4] The resulting amount is the RLWT that should be withheld.

4.6 Where the vendor’s acquisition price is equal to or exceeds the total purchase price, no RLWT is required to be withheld. Officials consider this to be an appropriate outcome where the vendor makes a loss on the sale of the property.

No other deductions allowed for determining standard RLWT rate

4.7 It is not proposed to allow any deductions other than the vendor’s acquisition price in calculating the gain for the purposes of determining the amount of RLWT to be withheld.

4.8 The bright-line test allows certain deductions against the purchase price in determining the amount of the tax liability. More specifically, deductions are allowed under ordinary rules. Losses from other land sales may be offset against a gain.

4.9 The problem with allowing these deductions in calculating RLWT is that it would fall to the conveyancers to determine the amount and deductibility of expenditure. Often complex and technical tax issues can arise in determining whether a deduction is allowed. This would impose considerable compliance costs on withholding agents who are not in a position to determine these matters without seeking advice from tax advisors or Inland Revenue. There would also be compliance costs for withholding agents in verifying that the deductions claimed are real and genuine.

4.10 Accordingly, a taxpayer who wishes to claim other deductions against the taxable gain (including perhaps losses on transactions arising after the sale of a residential property) will need to file an income tax return. The process for this is outlined in chapter 7.

At-cost disposals

4.11 In some situations, a person may be deemed to have acquired residential land from another person “at cost”. This could occur, for example, under a relationship property agreement where the transferee takes on the transferor’s cost base.

4.12 Officials do not consider that an exception from RLWT is necessary for these sorts of disposals, because the “lower of” approach would result in no funds being withheld under RLWT due to the use of the standard RLWT rate.

The default RLWT rate: 10% of the purchase price

4.13 As the objective of the RLWT is to approximate the vendor’s final tax liability arising under the bright-line test, officials consider that a default 10% rate would strike a fair balance between maintaining simplicity, minimising compliance costs and not overestimating the vendor’s expected final tax liability.

4.14 Accordingly, we suggest that RLWT applies at a default rate of 10% of the total purchase price of the residential land. In general, the default rate would apply in situations where the conveyancing agent cannot calculate the standard rate because there is insufficient information regarding the acquisition price or there is no acquisition price. In rare cases, it may be that the amount that should be withheld under default rate is lower than under the standard rate.

4.15 A 10% rate is used in a number of jurisdictions including Japan and the United States. However, some countries have much higher rates – for example, the withholding rate in Canada is 25% of the purchase price (and in certain cases, 50%). Australia recently announced a 10% withholding tax rate on sales of land and certain interests in land – albeit that measure is targeted at business assets and high-value residential properties.

4.16 Calculating the default rate based on the purchase price differs from New Zealand’s approach to RWT and NRWT, which apply on a per-payment basis. Calculating RLWT on a total purchase price basis eliminates issues that may arise when consideration for the property is made in a number of instalments.

Example:

Jane acquired a residential property for $800k after 1 October 2015 and after one year enters into a contract to sell the property to Paul for $900k. Jane’s gain is $100k ($900k - $800k). This means that the amount of RLWT that should be withheld under the standard rate is $33k (33% x $100k). $90k would need to be withheld under the default rate (10% x $900k). Under the “lower of” approach, $33k should be withheld by the withholding agent and paid to the Commissioner.

 

[4] This 33% rate is consistent with the resident withholding tax rate on dividends.