From 1 July 2016 lawyers will need to deduct Residential Land Withholding Tax from the proceeds of some residential property sales and pay it to the IRD. This is the new tax that is intended to help compliance with the residential investment property tax rules.
When is tax withheld?
The withholding tax will only apply when the property being sold is located in New Zealand and:
- is “residential land”
- the vendor purchased or acquired the property on or after 1 October 2015
- the vendor owned the property for less than 2 years before selling
- the vendor is an “offshore RLWT person”
There are exemptions where inherited properties are being sold and for transfers of relationship property.
How much is the tax?
An online calculator is available on the IRD website to help work out the amount of the tax to be deducted and paid to the IRD. This will be the lowest of:
- 33% (except for companies which is 28%) of the gain on sale
- 10% x the sale price
- Sale price less rates and amount needed to discharge the mortgage (where the mortgage is with a NZ registered bank or licenced non-bank deposit taker)
Agency commissions cannot be deducted out of deposits if there are insufficient funds. Neither can body corporate levies, usual LINZ fees or conveyancing costs.
What is an “offshore RLWT person”?
An “offshore RLWT person” is not the same as an offshore person in the tax statements introduced last year. An “offshore RLWT person” will include:
- A NZ citizen who has been overseas for the last 3 years or more continuously.
- Someone with a resident class visa who has been overseas for 12 months or more continuously. (Student visas or work visas are not resident class visas.)
- Someone who is not a NZ citizen or NZ resident, whether they are in or out of NZ.
- A company if more than 25% of its directors or more than 25% of the decision making rights are held or controlled by the types of individual persons described above.
- A trust where the trustees or certain beneficiaries are the types of individual persons described above.
- A limited partnership if 25% of the general partners or 25% of the partnership shares are held or controlled by the types of individual persons described above.
- For partnerships each partner will need to determine if they are an offshore RLWT person and they then might have tax deducted from their share of the property sale income.
One day or part day in New Zealand by a New Zealand citizen or resident is sufficient to ensure they are not overseas continuously within the relevant period and therefore not a “offshore RLWT person”.
“Offshore RLWT persons” can apply for a certificate of exemption from the residential land withholding tax regime where the property being sold is a main home or the vendor is a developer.
Where a vendor and a purchaser are “associated persons” for tax purposes, the purchaser must withhold the tax, rather than the vendor. Associated persons transactions will need to consider the new regime to consider whether the potential tax liability will sit with the correct entity.
What counts as residential land?
Residential land is land:
- That has a dwelling on it.
- Where a dwelling is to be built.
- Bare land that may be used for a dwelling under the rules in the relevant district plan.
- But, does not include farmland or land used predominantly for business premises.
How is the 2 year time period assessed?
The vendor’s ownership of residential land will more often than not commence on the date of registration of the transfer that appears on the certificate of title. Vendors who originally acquired off the plan, can back-date the acquisition date further, to the date they entered into the contract to purchase.
The end date, for the purposes of determining whether it is within 2 years of the acquisition date, will typically be the date that the agreement is entered into for the sale of the land, whether that agreement is conditional or unconditional.
New IR1101 forms
When acting on a residential property transaction we will need to get signed residential land withholding tax declaration forms (IR1101) from the vendors and we will also need certain supporting information. If we don’t get these then we will need to deduct the tax and pay it to the IRD otherwise we can be personally liable for penalties.
What does it mean for me?
We are hoping these provisions will be relatively straightforward for our New Zealand citizen and New Zealand resident vendor clients, particularly where we can meet you in person as part of a sale transaction. We will need to make sure we are clear when you acquired the land so that we can determine whether the new forms need to be completed.
Vendor clients who are “offshore RLWT persons” will need to work through these new provisions with us and their accountants carefully, as these requirements will need to be considered and all obligations met before we are in a position to complete settlements.
Traders are going to have to complete these new IR1101 forms each time they sell for residential property acquired post 1 October 2015. Developers may need to complete IR1101 forms on each sale also and might prefer to apply for an exemption.