Resident land withholding tax proposals announced and a new acronym to learn
September 2015 Tax Alert
Budget 2015 announced measures to ensure that people buying and selling residential property for a profit pay their fair share of tax, and proposed a new two-year bright-line test for the sale of residential property. So far we have had an issues paper outlining how the bright-line test will work, draft legislation to enable Inland Revenue to collect more information about people who are dealing in land and draft legislation to bring the bright-line proposals into law (see our other article in this issue). And now this week, the Government has released another Officials’ issues paper seeking feedback on proposals for a residential land withholding tax. There is now a new acronym to learn - “RLWT” which stands for resident land withholding tax. The paper suggests introducing a requirement for a RLWT to be withheld on the sale by an offshore seller of residential land in New Zealand which is subject to the bright-line test.
When would RLWT apply?
It is proposed the RLWT would come into effect from 1 July 2016 when:·
- The seller is an “offshore person”. This can include non-individuals;
- The property being sold is “residential land”; and
- The property is sold within two years of acquisition (i.e. the property is subject to the proposed bright-line test for residential property).
We note that while the proposed bright-line test would apply to residential land regardless of the geographic location, Inland Revenue has suggested that the RLWT be restricted to residential land in New Zealand.
The issues paper proposes that RLWT should be withheld at a rate that is the lower of:
- The standard rate: 33% of the seller’s gain (the difference between the purchase price and vendor’s acquisition price); or
- The default rate: 10% of the total purchase price.
Under the standard option, no deductions other than the vendor’s acquisition price will be allowed to calculate the gain. 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.
Who is liable to withhold?
In most property transactions, conveyancers or solicitors will be used by the buyer and/or seller. The paper proposes that these conveyancers and solicitors will be required to act as withholding agents and withhold RLWT on affected transactions where settlement occurs on or after 1 July 2016. Officials suggest the preferred option is for the primary obligation to fall on the buyer’s conveyancing agent, with a secondary obligation falling on the seller’s conveyancing agent if the buyer’s conveyancing agent fails to withhold the correct amount.
The proposals place significant compliance obligations on withholding agents who will need to:
- Register as an RLWT withholding agent;
- Confirm whether the seller is an offshore person and whether the RLWT applies;
- Calculate whether the standard or default withholding rate applies;
- Withhold the RLWT amount at the time of settlement;
- Pay the withheld amount of RLWT to Inland Revenue; and
- Provide the required information in a form approved by the Commissioner at the time of payment.
The paper canvasses options for agents to pay over withheld RLWT amounts to Inland Revenue on a transaction by transaction basis, or for those who handle large volumes of transactions, on a monthly basis. It is further noted that the Government suggests monetary penalties should be imposed on the withholding agent where there is a failure to withhold and pay over the RLWT.
Officials also state that the withholding and priority of RLWT should occur before payments are made in relation to the property (such as rates, repayment of the seller’s mortgage etc).
Credit for RLWT paid
For the offshore person, the RLWT will not be a final tax. The seller will be obliged to return the profit/losses in their annual income tax return and claim a tax credit for RLWT withheld. Where the RLWT results in over-taxation, a refund may be issued to the offshore person. In other words, the Government wants the tax deducted first, and then the onus will be on the offshore seller to file a tax return to claim a refund.
The closing date for submissions is 2 October 2015. If you have any questions in relation to the above or wish to explore the details further, please don’t hesitate in contacting your usual Deloitte advisor.
September 2015 Tax Alert contents
- Tax Alert September 2015
- GST: Online purchases – What will be caught and when?
- Inland Revenue clarifies “clarifying legislation” on acquisition date of land
- Resident land withholding tax proposals announced and a new acronym
- Draft legislation provides detail of bright-line test for residential land sales
- Business Transformation and the Rise of Tax Pooling
- Deloitte Integration Report 2015: Useful insights for CFOs and tax professionals when considering your M&A strategy
- Commissioner has dropped the mileage rate