Withholding tax now applies to bright line residential land sales by offshore vendors
Tax Alert - July 2016
1 July 2016 marked the commencement of the collection of a new withholding tax – the residential land withholding tax (“RLWT”). This tax was introduced as part of a suite of measures to improve compliance on residential property investment.
Broadly, the RLWT applies to residential land located in New Zealand, which was acquired post 1 October 2015 and sold by an offshore person (defined in the legislation as an “offshore RLWT person”) within two years of being acquired (i.e. it is subject to the “bright line” test).
Three calculations are required in order to determine the amount of RLWT to be withheld. The amount of RLWT is the lowest of:
- 33% (or 28% if the vendor is a company) x (the current purchase price less the vendor’s acquisition cost);
- 10% of the current purchase price; or
- The current purchase price less outstanding local authority rates less security discharge amount. The security discharge amount applies if the person paying the RLWT is the vendor or the vendor’s conveyancer and is the total of amounts required by licensed security holders to discharge their mortgages or other securities over the residential land.
The vendor is liable to pay the amount of RLWT to Inland Revenue. However the vendor’s conveyancer or solicitor, or if the vendor does not have one, the purchaser’s conveyancer or solicitor, is treated as the agent of the vendor in relation to the payment of RLWT. If neither the vendor nor purchaser has a conveyancer, the purchaser will be required to withhold the RLWT and pay it to the Commissioner of Inland Revenue.
An RLWT exemption certificate is available to persons who are disposing of their “main home” as defined, or for those in the business of developing land, erecting buildings or dividing land into lots, subject to meeting certain criteria.
The vendor has a tax credit for the amount of RLWT withheld by the agent in relation to land disposed of.
There is plenty of detail within these rules including:
- Who is an “offshore RLWT person”;
- When the obligation to pay RLWT arises, because it depends on there being a “residential land purchase amount as defined”;
- The options for payment by the agent who can choose to pay transaction by transaction or opt to “batch” various amounts. Batching might be preferred say by a solicitor who has a number of transactions in a month;
- The calculations required to determine the amount of RLWT. It will be important to ensure that any GST obligation is considered, as the prices used to calculate RLWT should be net of GST, if any; and
- The obligations of agents to determine whether vendors are subject to the rules and the information required to be provided to the Commissioner of Inland Revenue. Agents can be subject to penalties and use of money interest for not complying with the rules.
If you would like further information about these rules, please contact your usual Deloitte tax advisor.