Current Property Tax Issues

Tax statements, the “bright-line” test and residential land withholding tax

September 2016

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Introduction 2

1. Tax statement rules 3

Tax statements Tax statement rules apply to any “Specified Estate

in Land”: Not just to residential property Non-notifiable transfer tax statement Tax information tax statement Offshore person Errors, Offences and Retention Application date

2. “Bright-line”test 8

Application What is residential land? Two year bright-line period Key exceptions Trusts Involuntary disposals Gains and losses Land-rich companies and trusts

3. ResidentialLandWithholdingTax 12

RLWT and the bright-line test What is an offshore person for RLWT purposes? RLWT certificate of exemption Who pays RLWT? How much RLWT must be paid? Mortgagee sales In kind transactions/land swaps Tax credit and interim return Vendor information Issues for conveyancers in relation to vendor information Receiverships, liquidations and bankruptcy Suggested checklist

Contents

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Yes

No

Transferor Transferee

Yes

No

Yes

No

Date

Yes

Not Applicable No

Land Transfer Tax Statement

Sections 156B & 156C of the Land Transfer Act 1952

• You can use this form to provide the required tax details as part of registering your property transfer.

• A separate tax statement will need to be completed for each individual or entity

• See notes (attached) for details on how to complete this form.

1. Property details

Certificate of title reference (Computer Register)

Instrument number (if available)

Q1.1: Does the transfer involve land that has a home on it?

2. Seller /Buyer identity

Indicate if this statement is for the seller (transferor) or buyer (transferee)

Full name of the person/s or entity involved in the transaction (Before completing the name refer to section 2 in the notes)

Q2.1: Are you or a member of your immediate family a New Zealand citizen

or a holder of either a resident, work or student visa?

Q2.2: If you are a buyer and you or a member of your immediate family

hold a work or student visa, do you or a member of your immediate

family intend living on the land?

3. Non-notifiable transfer reasons

If you wish to claim an exemption from providing tax details enter the non-notifiable reason code

Refer to section 3 in the notes

If you have claimed a non-notifiable reason go directly to section 5 to sign

4. Tax details at the date of this statement

Enter your New Zealand IRD number here

(Before completing the IRD number refer to section 4 in the notes)

Are you a tax resident in a country/jurisdiction other than (or as well as)

New Zealand

If you answered no to the last question go directly to section 5 to sign

Country/jurisdiction you are a tax resident in

Country code (refer to section 4 in the notes)

Your taxpayer identification number for this country

Note: If you are a tax resident in more than one country/jurisdiction, other than New Zealand, complete the above three boxes for the

second and subsequent country/jurisdiction and attach to this statement

5. Signature

I certify that the information in this statement is true and correct at the time of signing this. I am aware there are penalties for

providing incorrect information.

Signature

Name

(if signing as an authorised person)

Position or office held

Over the past 12 months, the Government has introduced a package of reforms related to land dealing activities. These are:

• A requirement for parties involved in any transfer of land to provide tax statements (effective from 1 October 2015);

• A specific income tax provision for gains realised from the sale of residential land within two years of its acquisition ("bright-line test") (also effective from 1 October 2015); and

• A residential land withholding tax (RLWT) to buttress the bright-line test (effective from 1 July 2016).

While these are ostensibly "tax" reforms, there are clearly other drivers. The tax statement requirements possibly have as much or more to do with detecting money laundering and other international criminal activity as monitoring compliance with New Zealand tax rules. Likewise, the reforms as a whole may have been intended to act as a lever to dampen the margins of the red hot Auckland housing market, or at least create the impression of doing so. Little tax will be collected under the bright-line / RLWT measures, and it is doubtful they would be justified on a tax policy basis alone.

A snapshot of the Land Transfer Tax Statement form

Introduction

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When announcing these (and related) measures in the 2015 Budget, the Government said that they were aimed at ensuring that property buyers - including overseas speculators - who buy residential property with the intention of selling for a gain, pay their fair share of tax as required by the law. Nevertheless, the new tax statement rules apply not just to transfers of residential property but to any land transfer (and, as mentioned above, the underlying motive for their introduction appears to go beyond tax compliance).

The rules also require “offshore persons” to provide both their tax identification number in their home country and a New Zealand IRD number as part of the tax information. Before an IRD number can be obtained, an offshore person first needs to have a New Zealand bank account. This means the person has to satisfy the relevant bank’s verification of identity requirements under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.

Land Information New Zealand (LINZ) is now not able to register a transfer without receipt of a tax statement from each of the transferor and transferee. However, LINZ is merely intended as a collection vehicle, as the information will not form part of the land transfer register and must be provided by LINZ to the IRD.

Tax statement rules apply to any “Specified Estate in Land”: Not just to residential property

It is worth reiterating that the rules apply to more than just residential property as (at least initially) there was some confusion on this point, caused by the contemporaneous introduction of the two year “bright-line” test for income tax on sales of certain residences. This confusion was evident in IRD’s own media release announcing the rules had passed into law, in which it said they will apply to “residential property”.

However, the legislation is clear. The rules apply to transfers of all freehold estates (including fee simple and life estates), leasehold estates, stratum estates in freehold or leasehold (under the Unit Titles Act 2010) and licenses to occupy (as defined in the Land Transfer Act 1952). All such interests in land, whether residential or not, are “specified estates in land”, to which the rules apply.

1. Tax statement rules

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Tax statements

Every transferor and every transferee needs to complete their own tax statement. The LINZ standard form is now used almost invariably, although strictly speaking use of this form is not mandatory.

There are two types of tax statement, being a “non-notifiable transfer” or one for which “tax information” must be supplied. However, every tax statement needs to be dated and state:

• The full name (and signature) of the transferor or transferee (as applicable);

• Whether the transfer is of land that has a home on it (home defined for this purpose as a "dwelling mainly used as a residence");

• Whether the transferor or transferee (as applicable), or a member of that person’s immediate family, is a New Zealand citizen or holder of a resident visa, work visa or student visa; and

• Whether the transfer is a non-notifiable transfer (either for both parties or for the person making the statement) and, if so, the category of non-notifiable transfer.

The transferee’s statement must, in every case, also state whether the transferee or member of his/her immediate family intends on living on the land.

Non-notifiable transfer tax statement

If the transfer is non-notifiable, no further information is required to complete the tax statement. Generally only a natural person (ie

an individual) is able to provide such a tax statement, and this ability is restricted.

Subject to the exclusions noted below, a natural person transferor provides a non-notifiable transfer tax statement where the land being transferred has been used predominantly, for most of the time owned by the transferor, for a dwelling that was the transferor’s “main home”. A main home means the one dwelling mainly used as a residence by the person (“home”) and, if they have more than one home (as defined), the home with which the person has the “greatest connection”. The “greatest connection” concept is not defined, but IRD has stated that the factors that determine these connections would include:

• The time the person occupies the dwelling;

• Where their immediate family (if any) live;

• Where their social ties are strongest;

• The person’s use of the dwelling;

• The person’s employment, business interests and economic ties to the area where the dwelling is located; and

• Whether the person’s personal property is in the dwelling.

As IRD notes, these factors are similar to those used to determine if a person has a permanent place of abode under current case law concerning the tax residency of an individual. Therefore, IRD considers existing guidance on the “permanent place of abode” test should assist in determining

The transferee’s statement must,

in every case, also state whether the

transferee or member of his/her immediate

family intends on living on the land.

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what property the person has the greatest connection with1.

Subject again to the exclusions noted below, a natural person transferee provides a non-notifiable transfer tax statement where he or she intends to use the land predominantly for a dwelling that will be the transferee’s main home (as above).

A natural person cannot provide a non-notifiable tax statement if they are:

• Providing the statement in their capacity as a trustee (so that the transfer of any family home that a trust has owned or will own is not a non-notifiable transfer); or

• A transferor that has claimed at least twice, within the immediately preceding two years, that he or she has made "main home" non-notifiable transfers; or

• An offshore person.

The following transfers are also non-notifiable transfers in relation to a transferor:

• A transfer by a public authority or a local authority;

• A transfer on a distribution by an executor, administrator, or trustee of a deceased person’s estate to a beneficiary who is beneficially entitled to receive the property under the will or the rules governing intestacy;

• A transfer of mortgaged land by the mortgagee;

• A transfer by rating sale under the Local Government (Rating) Act 2002; and

• A transfer giving effect to an order of a court.

In addition, a transfer to a public authority or a local authority is a non-notifiable transfer in relation to the transferee.

Tax information tax statement

If the transfer does not qualify as a non-notifiable transfer for the person concerned, then the tax statement also needs to include the following tax information:

• The person’s IRD number (in which case an IRD number must be obtained if the person does not already have one); and

• Whether the person is tax resident in another jurisdiction (disregarding the effect of any double tax agreement).

If the person is tax resident outside New Zealand, they must also disclose the jurisdiction, the country code for that jurisdiction (prescribed by IRD) and the equivalent of the person’s IRD number in that jurisdiction.

Where a person is acting as (i) a nominee, or (ii) under a power of attorney, or (iii) on behalf of an unincorporated body, or (iv) in the capacity of a partner, in connection with a land transfer, the information (ie IRD number and tax residence) must relate to (i) the person who made the nomination, (ii) the person who granted the power of attorney, (iii) the unincorporated body, or (iv) the partnership.

Where a person is acting as trustee, the trust’s IRD number, not the

1 “New information requirements to improve tax compliance in the property investment sector", A special report from Policy and Strategy, Inland Revenue, September 2015, page 7.

The rules require offshore persons to provide a New Zealand IRD number as part of the tax information. Before an IRD number can be obtained, an offshore person first needs to have a New Zealand bank account.

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trustee’s own IRD number, must be provided. Many ordinary family trusts would not have been required to have an IRD number to date, but now need to obtain an IRD number before transferring or acquiring land.

Offshore person

As mentioned above, an “offshore person” cannot provide a non-notifiable transfer tax statement, and must provide the additional tax information. An individual is an offshore person if the person:

• Is a New Zealand citizen who is outside New Zealand and has not been in New Zealand within the 3 years immediately preceding the tax statement;

• Holds a residence class visa but is outside New Zealand and has not been in New Zealand within the last 12 months immediately preceding the tax statement; or

• Is not a New Zealand citizen and does not hold a residence class visa.

Non-individuals (companies and other bodies corporate, trusts, unit trusts and other unincorporated bodies) are offshore persons if they would be an overseas person under section 7(2)(b) to (f) of the Overseas Investment Act 2005. Generally, 25% control, ownership or entitlement by an overseas person (including an individual treated as an offshore person for tax statement purposes) of or in relation to a non-individual will render the non-individual an overseas person under that Act.

Errors, Offences and Retention

An omission or error in any tax information provided must be

It is an offence to provide a tax

statement that, to the person's knowledge

or with intent to deceive, contains false

or misleading tax information.

corrected by completing a corrected tax statement.

It is an offence to provide a tax statement that, to the person's knowledge or with intent to deceive, contains false or misleading tax information. A fine not exceeding $25,000 applies in relation to first time offences and a fine not exceeding $50,000 applies in relation to subsequent offences.

LINZ and the conveyancer who provides certification in relation to a transfer must retain tax statements for 10 years, and give a copy of the statement to the Commissioner of Inland Revenue as soon as practicable after receiving a request in writing from the Commissioner.

Application date

The new rules apply to any transfer of land where the contract of sale was entered into on or after 1 October 2015.

If the contract for transfer was entered into before 1 October (even if settled on or after 1 October), the new rules do not apply if the transfer is registered on or before 1 April 2016. In practice this concession for some pre-existing contracts has been widely disregarded.

Although not expressly addressed by the legislation, it should be expected that the law will be administered on the basis that a contract is entered into when it is signed by both parties, rather than when it becomes unconditional.

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Key points to bear in mind:

1. Clients must be made aware of the need to provide all relevant information in a timely fashion and any errors in the information provided to LINZ should be attended to as quickly as possible.

2. Offshore clients will need to be made aware of the requirement to obtain a New Zealand bank account and IRD number well in advance of settlement.

3. All trusts, including previously non-active trusts, will need to have an IRD number. Processing of applications by the IRD can take as long as three weeks.

4. When a trust or other unincorporated body is involved in a land transaction, each trustee of the trust or each member of the unincorporated body must separately provide tax statements.

5. Conveyancers need to be able to identify when a tax information tax statement, as opposed to a 'non-notifiable' transfer tax statement, is required.

6. Copies of all tax statements must be retained by conveyancers for at least 10 years.

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2.“Bright-line” test

New section CB 6A of the Income Tax Act 2007 (IT Act), known as the "bright-line" test, imposes income tax on any gain from residential land purchased and sold (or otherwise transferred) within two years, unless an exception applies. The new rule supplements existing land taxation rules in subpart CB of the IT Act, including section CB 6 which taxes gains from the disposal of any land acquired for the "purpose or intention" of disposal. Section CB 6A only applies if none of the other key taxing provisions (including section CB 6) applies.

However, the bright-line test does bring within the tax net some sales that previously would not have been taxable. For example, residential land bought as a long-term investment (and not for use as the main home) will be taxable under the bright-line test if sold within two years of acquisition (eg due to a change of personal or financial circumstances), even though the gain would not be taxable under section CB 6 or other pre-existing rules.

Application

The bright-line test came into force on 1 October 2015. However it can only apply to a disposal of land if the taxpayer first acquires an estate or interest in the land on or after that date. In the vast majority of cases, a person first acquires an estate or interest in land when they enter into an agreement to purchase it, including a conditional agreement. In practice, therefore, section CB 6A will only apply to a disposal of land if the person disposing of it entered into an agreement to acquire the land on or after 1 October 2015.

What is residential land?

Unlike the tax information measures which also took effect from 1 October 2015 (discussed above), the bright-line test does not apply to non-residential land.

The definition of residential land is land that has a dwelling on it, land where there is a plan or understanding to build a dwelling on it and bare land that by its area and nature is capable of having a dwelling erected on it. IRD says the latter will include bare land zoned as residential. "Dwelling" includes serviced apartments, but does not include units in rest homes and retirement villages.

Land used predominantly as business premises or farmland

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(including forestry, horticultural and pastoral businesses) is not residential land. "Predominant" use as business premises or farmland means the main use of the land concerned. Minor or incidental use is not sufficient.

Two year bright-line period

The two year period for the bright-line test spans the date of acquisition of the property to the date of disposal. In practice, due to different tests applying for the date of acquisition and the date of disposal, the bright-line period could be regarded (from a layperson’s viewpoint) as spanning more than two years.

The date of acquisition is generally the date of registration of transfer of the land. By contrast, the date of disposal is generally the

date that the seller enters into an agreement for the sale of the property (ie a conditional agreement that is subsequently settled), not the later date that the disposal is registered.

This means that the date of disposal for the seller (eg conditional agreement to sell) is earlier than the date of acquisition of the same property by the buyer (registration of transfer). This is deliberate, to prevent the bright-line test being thwarted by sellers, merely by extending the settlement date.

Special acquisition and disposal dates will apply in some situations. These are summarised in the tables below (adopted from Inland Revenue's November 2015 Special Report on the Bright-line Test).

Typeofacquisition Startdateofbright-linetestStandard purchase of land RegistrationSales where there is no registration of title

Latest date property acquired (according to ordinary rules)

Sales "off the plan" Date of entry into a contract to purchase Subdivided land The original date of registration for the

undivided landConverting a lease with a perpetual right of renewal into freehold title

Date the lease with a perpetual right of renewal is acquired

Typeofdisposal Endofbright-lineperiodStandard purchase of land Date of entry into agreement for saleGift Date of gift (generally registration of

title)Compulsory acquisition Date of compulsory acquisitionMortgagee sale Date land disposed of by mortgageeOther disposals where no contract to sell

Date of disposal according to ordinary rules

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Key exceptions

The bright-line test applies to the transfer of residential land, with exceptions or relief for:

• The main home, being the property used predominantly, for most of the time that the seller has owned the property, as their main home.

• Transfer under a relationship property agreement (where a relationship breaks down). The bright-line test may apply to a subsequent disposal within two years of the transfer.

• Transfer following death to an executor, administrator or beneficiary, and subsequent disposal by those persons.

In the case of transfers following death, the transfer from the deceased person to their executor or administrator, and from their executor or administrator to a beneficiary, is deemed a disposal and acquisition of residential land at the total cost of the land to the deceased person at the date of transfer (rather than at the land's market value). This ensures that while the bright-line test might ostensibly apply (depending on when the deceased person acquired the land), transfers in the course of the administration of the estate are given "roll-over" relief.

A disposal by a beneficiary of residential land transferred to them from a deceased person's estate, or by the executor or administrator, to a non-beneficiary,

is specifically excluded from the bright-line test. However, such disposals may still be subject to tax under pre-existing taxing rules in subpart CB of the IT Act.

The main home exception does not apply to a sale if, within the two years immediately preceding the date of disposal, that exception has applied to two or more other sales by the same seller, or the seller has engaged in a regular pattern of acquiring and disposing of residential land.

Trusts

Residential land owned by a trust can qualify for the main home exception, but only if:

• The trust-owned property is the main home for a beneficiary of the trust; and

• The principal settlor of the trust does not personally own a main home or the property being sold is their main home (the principal settlor being the person who has settled the most property, by value, on the trust); and

• The exception has not been used more than twice in the preceding two years; and

• The principal settlor has not regularly acquired and disposed of residential land.

Because of all these requirements, the bright-line test could have a significant impact on trusts owning a number of different residential properties occupied by various beneficiaries.

The bright-line test has exceptions or relief

for sales of the main home, and for transfers following a relationship

breakdown or death.

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Involuntary disposals

The bright-line test applies even where a disposal occurs involuntarily in the bright-line period, due to compulsory acquisition (eg under the Public Works Act 1981) or mortgagee sale.

Gains and losses

In determining the extent of any gain or loss, ordinary tax rules apply.

As such, the person disposing of the property, whether by sale, gift or otherwise, is deemed to derive market value, where the transfer occurs for less than market value.

The acquisition cost, together with incidental costs of acquisition and disposal (such as conveyancing costs and real estate commissions) are deductible in determining the net gain or loss, as are costs of improvements to the property.

If a loss, rather than a gain, occurs on a disposal of residential land to which the bright-line test applies, the loss is recognised for tax purposes. However, losses are ring-fenced in that they are only able to be offset against taxable income from other land sales under either the bright-line test or any other tax rule regarding land sales in sections CB 6 to CB 15 of the IT Act.

No loss is recognised on a sale to an associated person, due to concerns that losses will be engineered.

Land-rich companies and trusts

Anti-avoidance measures have also been implemented to prevent "land-rich" companies and trusts being used to circumvent the bright-line test. A land-rich company or trust is one where at least 50% of the value of the company or trust is attributable to residential land. The measures are intended to prevent the bright-line test being avoided by selling, or changing control of, an entity, which owns residential land, rather than selling the residential land itself.

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On 13 May, the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Act 2016 was enacted. This means that, from 1 July 2016, a withholding tax (known as residential land withholding tax (RLWT)) will apply where:

• Residential land located in New Zealand, acquired on or after 1 October 2015, is being disposed of;

• A “residential land purchase amount” is paid which would be income under the bright-line test in section CB 6A of the Income Tax Act 2007, ignoring section CB 6A(6) (which provides that the bright-line test applies only if none of sections CB 6 to CB 12 apply) and ignoring the main home exclusion from the bright-line test; and

• The person disposing of the land is an “offshore RLWT person”, unless the person obtains an RLWT certificate of exemption.

RLWT is intended to buttress the application of the bright-line test to offshore persons. There is an obvious concern that overseas

owners with no connection to New Zealand will not comply with New Zealand tax filing requirements. Imposing a withholding obligation on a local party involved in the transaction (normally the vendor’s conveyancer – see below) addresses that compliance risk.

Various parties made submissions in opposition to the introduction of RLWT, on the basis that the associated compliance burden is completely out of proportion to the amount of tax likely to be collected. Other submitters, including the New Zealand Law Society, pointed out various significant operational issues with the rules as proposed when the legislation was referred to a Select Committee for consideration. While this resulted in a number of changes, the compliance burden remains for both vendors and conveyancers. Having said that, the RLWT rules will require little to be done if and when the sale is not within the bright-line period.

RLWT and the bright-line test

As from 1 October 2015, the bright-line test generally requires income tax to be paid on any gains from the disposal of residential land within two years of acquisition. The RLWT rules will apply two key bright-line concepts, being:

3. Residential Land Withholding Tax

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Residentialland– this includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, as well as bare land that can have a dwelling erected on it under the relevant district plan. Residential land does not include business premises or farmland.

Twoyearbright-lineperiod– this generally starts at the point a person has title for the property transferred to them and ends at the time the person enters into a contract to sell the property. For sales “off the plan” the two-year period runs from the date the person enters into a contract to buy the property to the time when a person enters into a contract to sell the property.

What is an offshore person for RLWT purposes?

Individuals

The test applicable to individuals is essentially the same as in the LINZ tax information measures, but the timing of the test is different. An individual will not be an offshore RLWT person only if he or she:

• Is a New Zealand citizen and has been in New Zealand within the past 3 years; or

• Holds a New Zealand residency class visa and has been in New Zealand within the past 12 months.

Officials consider the personal presence in NZ must occur in the three year (for NZ citizens) or 12 month (for holders of residence class visas) period immediately preceding payment of a “residential land purchase

amount”. By contrast, for the LINZ tax information measures, the personal presence must occur in the period prior to date of registration of transfer.

Non-individuals

For LINZ tax information measures, a non-individual person (such as a partnership, trust or company), will generally be an offshore person if incorporated outside New Zealand or at least 25% owned (legal or beneficial) or controlled by an offshore person.

A more expansive concept will apply for RLWT purposes. A non-individual will be an offshore RLWT person if it:

• Is incorporated or registered outside New Zealand;

• Is constituted under foreign law;

• Is a company and and more than 25% of the company’s directors are offshore RLWT persons or more than 25% of the company’s shareholder decision-making rights are held directly or indirectly by offshore RLWT persons;

• Is a partner in a limited partnership and more than 25% of the limited partnership’s general partners are offshore RLWT persons or more than 25% of the partnership’s partnership shares are held directly or indirectly by offshore RLWT persons; or

• Is an owner of an effective look-through interest in a look-through company (LTC) and more than 25% of the LTC’s effective look-through interests are held directly or indirectly by offshore RLWT persons.

An “offshore RLWT person” is a more expansive concept than that of an offshore person for LINZ tax information purposes.

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Trustees

A trustee will be an offshore RLWT person if:

• More than 25% of the trustees are offshore RLWT persons;

• More than 25% of those that have the power to appoint or remove a trustee, or to amend the trust deed, are offshore RLWT persons;

• All natural person beneficiaries (including discretionary beneficiaries) of the trust are offshore RLWT persons;

• A beneficiary (including a discretionary beneficiary) that is an offshore RLWT person has received a distribution from the trust within one of the last four years before the relevant disposal of residential land and, if the beneficiary is a natural person, the total distributions to the beneficiary for the relevant year are more than $5,000; or

• The trust has disposed of residential land within four years before the relevant disposal of residential land and the trust has a beneficiary (including a discretionary beneficiary) that is an offshore RLWT person.

Co-owners

Officials originally recommended that RLWT apply where residential land is disposed of by a general partnership or other co-owners, if there is a more than 25% ownership interest by offshore RLWT persons. However, the Select Committee replaced this with an apportionment approach. The legislation treats each co-owner “as disposing of separate

residential land on the basis of an appropriate split of the underlying residential land and the consideration for its disposal”.

RLWT certificate of exemption

The RLWT rules will not apply to an offshore RLWT person who obtains an RLWT exemption certificate under section 54E of the Tax Administration Act (TAA). A certificate must be issued if the person satisfies the criteria in either subsection (2), (3) or (4), as follows:

Subsection(2): The person carries on a business of developing land or dividing land into lots or erecting buildings, and has provided a security to secure the performance of their tax obligations in relation to the residential land under section 7A of the TAA;

Subsection(3): The person carries on a business of developing land or dividing land into lots or erecting buildings and has had tax obligations with which it has complied for the 2 years before applying, and IRD is satisfied the person will continue to comply;

Subsection(4): The person is eligible for the main home exception from the bright line test. (IRD considers it will be rare that an offshore RLWT person will meet this test, since the land must have been used predominantly, for most of the time the person owns the land, for a dwelling that was the main home of the person.)

In their report to the Select Committee, officials opined that exemption certificates should only be “provided in bona fide cases

The RLWT rules will not apply to an

offshore RLWT person who obtains an RLWT exemption certificate.

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where the taxpayer is increasing housing supply, not simply renovating and/or speculating.” A concern, however, is that section 54E, as enacted, may preclude IRD from issuing exemption certificates to habitually compliant taxpayers who, as an incident of their business (but not their main activity), from time to time acquire residential land that may be subsequently disposed of when not required for their business. This issue has been raised with IRD.

Who pays RLWT?

Although the vendor will generally be liable for the RLWT, the vendor’s conveyancer will be the paying agent for RLWT purposes. If (unusually) the vendor does not have a conveyancer, the purchaser’s conveyancer will be the paying agent. However, if the vendor and purchaser are associated persons, the associated purchaser must withhold the RLWT.

Conveyancers who fail to meet RLWT obligations, or do not take reasonable care, will not be liable for the core tax amount, but will be able to be subjected to civil and criminal penalties under the Tax Administration Act 1994. IRD will also be able to report non-compliance to the Law Society and Institute of Legal Executives.

RLWT will need to be paid no later than the 20th of the month following the month in which a “residential land purchase amount” (see below) is paid (generally such a payment would occur on settlement).

RLWT is only to be paid from a “residential land purchase amount”, which excludes deposits and part payments totalling in aggregate less than 50% of the purchase price.

The conveyancer will need to file a prescribed return (IR1100) when paying RLWT, including a nil return if it is calculated (applying the RLWT formula discussed in the next heading) that no RLWT is payable in relation to a residential land purchase amount. IRD has confirmed that the conveyancer does not need to file a return if the vendor produces an RLWT exemption certificate.

How much RLWT must be paid?

RLWT is only to be paid from a “residential land purchase amount”, which excludes deposits and part payments totalling in aggregate less than 50% of the purchase price. If there is a series of part payments the RLWT obligation only arises once the 50% threshold is reached (but RLWT, calculated on the full purchase price, would then need to be withheld from the remaining payments).

RLWT that is payable (if any) will be the lesser of:

• The highest marginal personal tax rate [currently 33%] (or the corporate tax rate [currently 28%] if the vendor is a company that is not acting as a trustee) x (current purchase price – vendor’s acquisition cost);

• Ten percent of current purchase price; or

• (In some circumstances) current purchase price less any amount required to discharge a loan secured by a qualifying mortgage less outstanding local authority rates (presumably this includes any targeted rates, such as for

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home improvement).

The third option will be available only if the mortgage is held by a New Zealand registered bank or New Zealand licensed non-bank deposit taker, and the vendor has its own conveyancer. IRD says this is to prevent the vendor artificially gearing up before disposal, to circumvent RLWT.

If the purchaser’s conveyancing agent is liable to pay RLWT, they will be unable, in calculating the RLWT, to allow for amounts needed by the vendor to repay a loan secured against the property. In these circumstances the vendor may not receive sufficient net funds to be able to secure discharge of the relevant mortgage, leading to a deadlocked situation preventing settlement.

No reduction for any costs of improvements or costs of purchase or sale will be permitted in calculating RLWT.

Mortgagee sales

A sale by a mortgagee of residential land is subject to the bright-line test, even though it is the mortgagee and not the property owner that is selling the land. What is not clear is how the RLWT rules apply, or are intended to apply, to a mortgagee sale of residential land owned by an offshore RLWT person.

The conveyancer is acting for the mortgagee, not the owner, so one issue is whether the third option for calculating RLWT is available – given that option requires the vendor to have a conveyancer. Although the mortgagee would generally be regarded as the

vendor, the mortgagee’s status should be irrelevant in determining whether there is an offshore RLWT person. This has been raised with IRD.

In kind transactions/land swaps

As RLWT is only to be paid from a residential land purchase amount, in the case of land swaps IRD has been asked whether RLWT is payable only if there is also a monetary amount that forms part of the consideration (and, if so, whether RLWT is to be calculated by reference to the value of the sum of the in kind and monetary consideration).

Part payments

It is not uncommon for part payments of the purchase price to be made directly by a purchaser to the vendor, even though both parties have their own conveyancer, with only the settlement payment flowing from purchaser to vendor through the vendor’s and purchaser’s conveyancers. The vendor’s conveyancer is only liable to withhold any RLWT payable from the settlement payment, and the vendor’s conveyancer has no RLWT payment obligation to the extent that the RLWT payable exceeds the settlement payment. However, if the RLWT deducted is less than the RLWT payable, a written explanation must be provided to IRD. IRD can be expected to impose penalties if it considers a part payment situation has been structured to avoid RLWT.

To date, IRD does not consider the purchaser would be liable to

No reduction for any costs of improvements or costs of purchase or

sale will be permitted in calculating RLWT.

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withhold RLWT payable from any residential land purchase amount it pays direct to the vendor, where the vendor has a conveyancer.

Tax credit and interim return

RLWT will be an interim withholding tax, not a final tax. A vendor will have a tax credit for the amount of RLWT paid. The vendor will be able to file an interim tax return before the end of the tax year, if it believes the RLWT exceeds the tax payable. IRD will be required to repay RLWT if and to the extent that:• A tax credit for the RLWT is likely

to be a surplus credit, having regard only to the residential land disposed of;

• The person has no outstanding tax obligations; and

• The person has provided IRD with information in a prescribed form (IR1102), that will require information as to (i) income and deductions relating to the land “for the period of the part of the income year before the date that is 1 month after the relevant disposal”.

In most cases, any income tax liability under the bright-line test will arise when the vendor enters into an agreement for sale of the residential land, that being the usual date of disposal for the bright-line test. Where settlement (and payment of a residential land purchase amount) occurs only after the end of the income year in which the land is treated as being disposed of, the vendor will receive a credit for RLWT paid to IRD, which credit will be attributed to the income year of disposal. By this means, the vendor can utilise

a credit arising in a later income year to reduce or eliminate tax payable in relation to the deemed earlier date of disposal.

Vendor information

A vendor who enters into an agreement to sell residential land acquired within the bright-line period will be required (by section 54C of the TAA) to give its conveyancer or, if it does not have one, the purchaser’s conveyancer, information before payment of a residential land purchase amount.

The vendor will be required to complete a Residential land withholding tax declaration (IR1101) form, and the declaration will include:

• Name, address and tax file number;

• Whether or not it is an offshore RLWT person; and

• If it is an offshore RLWT person, whether:

(a) The bright-line test applies to it ignoring section CB 6A(6) (which provides that the bright-line test applies only if none of sections CB 6 to CB 12 apply) and ignoring the main home exclusion; and

(b) Also if it is associated with the purchaser.

If the vendor is not an offshore RLWT person, this must be verified as follows:

• By the vendor personally if an individual;

• If the vendor is a company (including an LTC), by a director who is not an offshore RLWT person;

The vendor will be required to complete a Residential land withholding tax declaration (IR1101) form.

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• If the vendor is a limited partnership, by a general partner who is not an offshore RLWT person;

• If the vendor is a trust, by a trustee who is not an offshore RLWT person.

The residential land withholding tax declaration form also prescribes the documents to accompany the information to be provided by the vendor or the verifier. The form also prescribes the material required to support a statement that the person is not an offshore RLWT person or, if an offshore RLWT person, that the bright-line test does not apply. Officials have suggested that a natural person vendor may be able to sit down with and show the conveyancer their NZ passport.

The verifier (of the statement that a non-individual vendor is not an offshore RLWT person) must also support its eligibility to verify the statement (ie that the verifier is not an offshore RLWT person and is a director etc).

Information provided to the conveyancer/paying agent must be retained by the recipient for seven years.

A vendor with an RLWT exemption certificate must provide its conveyancer with a completed Residential land withholding tax declaration, in which it confirms that it holds an exemption certificate. The form also requires it to show the conveyancer the original of the certificate. The declaration and a copy of the certificate of exemption should be retained by the conveyancer for seven years.

Information provided to the conveyancer/paying agent must be retained

by the recipient for seven years.

Issues for conveyancers in relation to vendor information

If the conveyancer is provided with a form and verifying documents (complying with section 54C of the TAA) which confirm no RLWT is payable, then the conveyancer will not need to do anything further, other than to retain the statement and supporting information. In particular, the conveyancer will not need to file a return with IRD.

Further, the conveyancer will not be subject to any penalty liability for a failure to withhold due to false or inaccurate information provided in the form or verifying documents provided it was “reasonable” for the conveyancer to rely on this information. The section 54C process is therefore a critically important one for conveyancers. In an ideal world, they would not be involved in completion of the section 54C form, but in practice it may well be the case that vendors seek assistance from their conveyancers in completing the form and in determining whether (for example, in the case of a trust) the trust vendor is an offshore RLWT person. Conveyancers will need to tread carefully, because if they have an important role in the production of a statement, any “reasonable reliance” protection may be lost.

Officials have noted that if the vendor does not provide the relevant conveyancer with all the information necessary to calculate the RLWT, then the

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conveyancer should deduct an amount equal to 10% of the purchase price.

A vendor’s conveyancer should ensure their terms of engagement exclude liability in relation to any RLWT incorrectly withheld from an amount held on the client’s behalf, so as to provide protection from a claim by the vendor for any RLWT withheld.

Officials appear to consider that, when RLWT is payable, the conveyancer should obtain the acquisition cost from Quotable Value to verify the vendor’s information on cost and that it would only be reasonable to rely on a different acquisition price provided by the vendor if sufficient evidence is provided, such as the original acquisition contract. The legislation does not support the officials’ view that the paying agent has to independently verify any of the information provided, as that appears inconsistent with the notion of reasonable reliance on that information. However, this is an area where caution should be exercised.

Receiverships, liquidations and bankruptcy

At the Select Committee stage, it was submitted that RLWT should not apply where the vendor is in liquidation or receivership. This submission was accepted in the Officials’ report to the Select Committee, with officials stating that RLWT should be treated the same as other withholding taxes on income (such as RWT and NRWT) in situations of liquidation or receivership. However, as

enacted, the RLWT rules appear to apply to vendors that are in receivership or liquidation. IRD has been asked to clarify the position.

IRD is considering this issue.

 

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Suggested checklist

IRD is required to prescribe the information and documents that a vendor selling within the bright-line period must provide to the vendor’s conveyancer (or purchaser’s conveyancer if, unusually, the vendor does not have a conveyancer). In the meantime, the following is a suggested checklist of information, documents and steps, intended to assist the vendor’s conveyancer in the usual case where the vendor is not associated with the purchaser.

Vendorinformationtobeprovidedtoconveyancer(onaprescribedform)priortoreleaseofaresidentiallandpurchaseamount:

Name, address and tax file number.

Whether or not an offshore RLWT person.

If an offshore RLWT person, whether bright-line test applies to its disposal (ignoring section CB 6A(6) (which provides that the bright-line test applies only if none of sections CB 6 to CB 12 apply) and ignoring the main home exclusion.

If bright-line test applies:

• Whether vendor has an RLWT exemption certificate;

• Vendor’s acquisition cost;

• Amount required to discharge any mortgage held by a New Zealand registered bank or New Zealand licensed non-bank deposit taker; and

• Amount of any outstanding local authority rates.

Verifyinginformationpriortoreleaseofaresidentiallandpurchaseamount:

Proof of address and tax file number.

Production of any RLWT exemption certificate (if provided, no further information or steps are required).

Vendor or verifier evidencing claim not to be an offshore RLWT person (eg natural person vendor or verifier shows conveyancer NZ passport).

Landonline search by conveyancer to confirm date vendor became registered proprietor.

Vendor provides original of acquisition agreement showing acquisition cost (recommended that conveyancer also obtains acquisition cost from Quotable Value).

Letter from mortgagee showing amount to discharge mortgage (if applicable).

Conveyancer checks with local authority whether any outstanding rates (including targeted rates).

RLWTcalculationpriortoreleaseofaresidentiallandpurchaseamount:

Conveyancer calculates RLWT (if any) to be withheld from residential land purchase amount.

Conveyancer pays residential land purchase amount to vendor after first withholding RLWT (if any).

Finalconveyancersteps

Conveyancer files a prescribed return with IRD (if RLWT calculation was required) and, if RLWT has been withheld, pays RLWT to IRD, by 20th of the month following payment of the residential land purchase amount.

Conveyancer retains all information for seven years.

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Contacts

Barney Cumberland BA LLB(Hons) – Partner, Auckland

DD: +64 9 977 5155M: +64 21 497 462E: barney.cumberland@simpsongrierson.com

Paul Windeatt LLB(Hons) MA – Senior Associate, Auckland

DD: +64 9 977 5024M: +64 21 240 9240E: paul.windeatt@simpsongrierson.com

www.simpsongrierson.com

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