Recent tax changes relating to property transactions – Implications for overseas persons. By Atticus Legal, Lawyer Hamilton
Recent changes to New Zealand law and tax administration have arisen following pressure on house prices, particularly in Auckland, over the last few years. This article by Atticus Legal, Lawyer Hamilton explains the new developments.
The first change, which took effect on 1 October 2015, requires a ‘Land Transfer Tax Statement’ to be completed by both sellers and buyers and registered at the Land Registry for transfers of all land (whether residential or commercial). See further below. More recently, with effect from 1 July 2016, another law change requires lawyers to deduct and pay to the IRD a withholding tax called a ‘Residential Land Withholding Tax’ (‘RLWT’) that applies to sales of residential land by certain ‘offshore RLWT persons’ where the property is sold within 2 years of purchase.
This information sheet by Atticus Legal, Lawyer Hamilton, summarises who is affected by RLWT and how it is to be dealt with.
Resident Land Withholding Tax (RLWT) for ‘offshore persons’
Importantly, the definition of an ‘offshore RLWT person’ is broader than might be expected – for example, it includes New Zealand citizens who are resident overseas. The definition is not the same as the normal definition of tax ‘residency’.
This new obligation for lawyers to collect and pay this tax to the IRD is compulsory, subject to the below exemptions. It will add to the work required to complete residential transactions for ‘offshore RLWT persons’ and will result in higher legal fees being payable in such cases. We can, on request, provide an estimate of our fee where RLWT is involved.
Where RLWT is payable, we are required to deduct it from the sale proceeds and pay it to the IRD. However, adjustments may later be made by the IRD if the offshore person concerned files a tax return with the New Zealand IRD at the end of the tax year (for example, claiming all tax deductible expenses which may reduce the assessed tax payable).
Who is an ‘offshore RLWT person’?
An individual is an offshore RLWT person if s/he is:
- a New Zealand citizen who has not been in New Zealand within the last 3 years, or
- a New Zealand resident who has not been in New Zealand within the last 12 months, or
- neither a New Zealand citizen nor a New Zealand resident.
A company or partnership is an offshore RLWT person if:
- it is incorporated or registered outside NZ, or is formed under foreign law, or
- more than 25% of the directors or general partners are offshore RLWT persons.
In addition a company will be an offshore RLWT person if more than 25% of its shareholder decision-making rights are held (directly or indirectly) by offshore RLWT persons.
The trustees of a trust can also be an offshore RLWT person. The rules determining whether a trust is an offshore RLWT person are more complicated than for individuals, companies and partnerships. We can advise on that if needed.
How much is RLWT?
The RLWT payable is the lesser of:
- 10% of the (gross) sale price, or
- (Sale price less purchase price) multiplied by 33% (or 28% for companies, unless the company is acting as a trustee of a trust), or
- Sale price less NZ registered securities (ie. amount owing under any mortgage over the property) and outstanding local authority rates.
Note that under the last-mentioned calculation, no deductions are allowed for the purpose of calculating RLWT other than the mortgage balance at time of sale and the rates payable on the property, unlike a normal taxable profit calculation where various tax deductible expenses are allowed (eg. repairs and maintenance, estate agent’s commission, etc). Those deductions may be claimed by the offshore RLWT person by filing a tax return with the IRD at the end of the tax year.
A seller who would otherwise be an ‘offshore RLWT person’ may be able to obtain a ‘certificate of exemption’ from the IRD (thereby avoiding the need to have RLWT deducted from their sale proceeds) where:
- they are a property developer selling residential lots or completed dwellings; or
- the property sold is their ‘main home’ (although this is unlikely for most offshore sellers).
There are other limited exemptions which may apply relating to deceased estates and inherited property. Atticus Legal, Lawyer Hamilton, can advise on that if necessary.
Completing an IR1101 declaration by Offshore RLWT persons
Sellers will need to complete an IRD form, declaring whether or not they are an ‘offshore RLWT person’, where all of the following apply:
- the property is residential property in New Zealand,
- the seller acquired the property on or after 1 October 2015,
- the sale price is paid or payable on or after 1 July 2016, and
- it has been less than 2 years between the date of acquisition (settlement date) and the date of the contract for sale of the property (contract date).
If you declare that you are not an offshore RLWT person, you will have to provide supporting evidence. If necessary Atticus Legal, Lawyer Hamilton, can advise what documentary evidence is required.
Land Transfer Tax Statements & the need for a NZ IRD number and a NZ bank account
As mentioned above, as from 1 October 2015 a signed Land Transfer Tax Statement must be registered at the Land Registry by both sellers and buyers for each transfer of property (whether residential property or otherwise). Briefly, the Taxation (Land Information and Offshore Persons Information) Act 2015 is a disclosure regime which requires prescribed information for all transfers of land (which will be available to the IRD, for example for assessment of a taxpayer’s obligations regarding income tax and GST on property transactions). Without it the title transfer cannot be registered. All properties are affected by these rules. Each seller and buyer must disclose their NZ IRD number, except in limited circumstances (eg. where the property sold/purchased is or will be the “main family home” of the owner and his/her family). At Atticus Legal, Lawyer Hamilton, we prepare these forms for you for signing as part of the normal conveyancing process.
The consequence of the above is that unless a seller/buyer fits within one of the exceptions (eg. because the property is a main family home) then he/she must disclose his/her NZ IRD number in the Land Transfer Tax Statement. In turn this means that offshore persons and non-residents who do not have a New Zealand IRD number will be required to apply for and obtain a NZ IRD number before they can complete the sale or purchase concerned. This application for an IRD number will need to be completed on the appropriate form. That application form (in the case of non-resident individuals) requires that the person concerned have an operating bank account in NZ in their name (even if they do not earn NZ sourced income). Evidence of this must be provided to the IRD along with the application for an IRD number.
Note that the above-mentioned declaration by offshore RLWT persons also requires a NZ IRD number.
In light of the above, non-residents who do not have an IRD number will need to take the above steps promptly on or before entering into a sale or purchase contract. The setting up of a bank account and the IRD’s processing of an application for an IRD number takes time. A delay in attending to this may cause a delay in settlement of the transaction. At Atticus Legal, Lawyer Hamilton, we are happy to clarify any of the above if you wish. Just give us a call.
WANT TO KNOW MORE? Just Ask Atticus Legal, lawyer Hamilton
CALL ANDREW SMITH, the owner of Atticus Legal, for expert professional advice on any of the matters referred to in this information sheet.
TO RECEIVE FURTHER INFORMATION SHEETS FROM ATTICUS LEGAL please ‘like us’ on Facebook to ensure you receive our future posts.
LAWYERS HAMILTON NZ
11 Garden Place (Level 7), HAMILTON
Ph: (07) 839 4558, Fax: (07) 839 4559, Mob: 021 508 189
SEE OUR WEBSITE: www.atticuslegal.co.nz
Disclaimer: The information contained in this information sheet is, of necessity, of a general nature only. It should not be relied upon without appropriate legal advice specific to your particular circumstances.
This information sheet is copyright © Atticus Legal, July 2016.