RLWT now even more complex for conveyancers
On 21 February 2017, the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 received royal assent.
The Act contains several changes to the Residential Land Withholding Tax (RLWT) rules in the Income Tax Act 2007. As a result of the changes, calculating the RLWT amount is now a much more complex exercise.
The RLWT rules came into effect on 1 July 2016 and introduce a withholding tax in relation to income derived under the two year bright-line test where the vendor is an “offshore RLWT person”. The rules impose an obligation, primarily on conveyancers, to withhold RLWT from settlement monies in certain circumstances.
In LawNews Issue 25 last year (29 July 2016), we considered the definition of who is an “offshore RLWT person” for the purposes of the RLWT rules. The rules contain definitions for natural persons, companies, limited partnerships and trusts. In many cases, the definitions are different from the definitions of an “offshore person” for the purposes of the Tax Statement. In particular, many New Zealand discretionary trusts will find themselves to be an offshore RLWT person, notwithstanding that they would normally be regarded as on-shore entities and may not be an “offshore person” for the Tax Statement.
RLWT and GST
The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act makes changes to the way that RLWT is calculated. Section RL 4 of the Income Tax Act sets out the three calculation methods for RLWT. RLWT will be the lesser of (up the residential land purchase amount):
a. the greater of zero and the RLWT rate (33% or 28% for companies) times (the sale price less the vendor’s acquisition cost);
b. 10% of the sale price; and
c. the greater of zero, and the sale price, less security discharge amount (if the vendor’s conveyancer is the paying agent) less outstanding rates.
Throughout the legislative process, RLWT was presented as being simple to calculate and it was proposed that RLWT withholders could easily obtain information from publicly-available sources such as Quotable Value. We disagree.
Before the introduction of the recent changes, the legislation was silent as to how GST was to be taken into account in the formulae. Section RL 4 has now been amended such that all amounts in the formulae are GST exclusive.
On the face of it, this may seem to be a small change. However, in practice, we anticipate that this change will require a significant amount of time and analysis (i.e. cost) to calculate the RLWT amount.
Determining the GST exclusive amount of the sale price will not be overly onerous as a conveyancer will have a copy of the sale and purchase agreement for the sale transaction in order to ascertain whether or not the contract is “plus GST” or “inclusive of GST” and will be able to determine whether or not the vendor is GST registered.
Similarly, as all council rates are subject to GST, a conveyancer should be able to calculate the GST exclusive amount.
The security discharge amount will be exempt from GST.
Where it gets complicated is that an RLWT withholder will now have to ascertain the GST treatment for the vendor on the purchase of the property in order to determine the GST exclusive amount for the vendor’s acquisition cost under method (a) above. This is troublesome given it is likely that the RLWT amount will be calculated under method (a) in most cases.
To determine the GST exclusive acquisition cost, conveyancers will now need to obtain, at the very least, a copy of the sale and purchase agreement, settlement statement and tax invoice (if any) on acquisition.
As practitioners will be aware, GST on land transactions can be extremely complex. Issues which now need to be considered will include:
- Whether or not the person from whom the vendor purchased the land was GST registered.
- Section 5(15) of the Goods and Services Tax Act 1985 provides that a supply of land can comprise of more than one supply – a typical example being land comprised of an exempt portion (being the supply of a dwelling and curtilage) and a taxable portion. Therefore, although the amount paid for the property may include a GST component, it is not as simple as just taking 3/23rds of the purchase price to calculate the GST amount.
- Issues associated with the compulsory zero rating regime and retrospective deemed GST registration.
- Where the RLWT withholder is the purchaser’s conveyancer because the vendor and purchaser are associated under the general associated persons provisions in the Income Tax Act 2007 or if the vendor does not have a conveyancer, the purchaser’s conveyancer will now need to obtain copies of the documents listed above relating to the vendor’s purchase of the property. Given the calculation of RLWT can only be made immediately before settlement, we anticipate that obtaining this information may prove difficult, let alone then undertaking a GST analysis of the transaction.
- Conveyancers will also need to ensure that they are familiar with their client’s contractual obligations if the agreement for sale and purchase is the latest version of the ADLS/REINZ Sale and Purchase Agreement for Real Estate. The RLWT clause sets out obligations on the vendor and purchaser to provide sufficient information to determine the RLWT obligations and confirmation of the offshore RLWT person status.
Eligibility for RLWT Certificate of Exemption
The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act also makes amendments to the eligibility criteria for developers to apply for a certificate of exemption from RLWT. The two-year good taxpayer criteria has been extended to include taxpayers that have an associate that is a company in the same group of companies or partner in a limited partnership that has a two-year good taxpayer history.
Notable omissions from this extension are other taxpayer entities such as trusts, look-through-companies and ordinary partnerships. We cannot see the policy intent for extending the eligibility criteria to group companies and partners of a limited partnership but not to other entities.
Settlements of relationship property
One welcome change is to exclude property transfers that are “settlements of relationship property” from the RLWT rules. Practitioners must be mindful that in order for a transfer to be a “settlement of relationship property”, it must be between parties (or their associates) that enter into an agreement for the purposes of Part 6 of the Property (Relationships) Act 1976 or a court order under section 25 of that Act.
The RLWT changes have retrospective effect to 1 July 2016.
About nsaTax - nsaTax is New Zealand’s largest specialist tax advisory firm. For the past 21 years, nsaTax has been providing advice on taxation and trust-related issues to over 900 accounting and legal firms. nsaTax offer a “tax help” phone and email service for advisers as well as written opinions on tax, trust and accounting-related issues.
RLWT Checklist - nsaTax has produced a RLWT Checklist that is available for purchase to assist lawyers and accountants navigate the RLWT rules. Go to nsatax.co.nz for more details.