The third wave of the Government’s property tax overhaul arrived recently, and it’s already presenting some quirks that can catch out the unwary.
The July introduction of a Residential Land Withholding Tax (RLWT) follows two earlier pillars in the property tax reform, both of which were brought in in October last year. The much-publicised “bright-line test” for the sale of residential land aims to ensure speculators holding property for less than two years pay income tax on profits made, while new requirements on the disclosure of tax information on land transfers was introduced to back up that new legislation by ensuring the right details are captured.
The purpose of this latest law change is to improve offshore speculators’ tax compliance by ensuring that tax payable on profits made from holding property for a short time is deducted when it’s is sold.
There are three key points with the most recent change:
1. Not all land is caught by the new tax. The only property that’s subject to it is New Zealand land that was acquired by the vendor on or after October 1, 2015. Residential land includes land with a dwelling (or plans to build a dwelling), or land that can be used to build a dwelling under the relevant district plan. It doesn’t include land that is used for business or farming.
2. RLWT only applies if the land is caught, and the vendor is classed an “offshore RLWT person” – as in, they are not a New Zealand citizen and don’t hold a residence-class visa, or, if they are a New Zealand citizen, they’ve lived overseas and have not been physically present here within the past three years. New Zealand companies and trusts might also be classed as such if they include offshore interests. Note, some exemptions can be granted if certain criteria are met.
3. If the land isn’t caught by the new rules, then no further action’s needed.
So, given the key objective is to ensure tax obligations are met on certain property, who’s required to make sure the money lands in the Government’s coffers?
That onus falls primarily on the vendor’s conveyancing solicitor, as agent for the seller. If the vendor doesn’t have a lawyer, though, the obligation defaults to the purchaser’s solicitor. As well as ensuring payment, tax forms must also be completed.
There are three calculations that determine the amount that needs to be withheld from the sale to cover the tax – you can check out the IRD’s handy calculator IRD calculator.
The total payable is the lowest of:
- 33 percent (or 28 percent if the vendor is a company) x current purchase price minus the vendor’s acquisition cost for the land
- 10 percent of the current purchase price
- Current purchase price minus the outstanding local authority rates, minus security discharge amount
Already confusion is cropping up around certain scenarios – for example, where land has been bought and then built on. The calculation uses the acquisition cost for the land and does not factor in the cost of building, or other improvements at this point. It’s therefore possible that the RLWT payable exceeds the funds available. The costs of sale are not all deducted before the RWLT amount is calculated.
If you’re trading any property, make sure you’re clear on whether any Residential Land Withholding Tax applies, and seek legal advice very early on in the sale process.
