Problems with the proposed residential land withholding tax
A new bill has been introduced into Parliament which proposes a residential land withholding tax on residential property located in New Zealand sold within two years by offshore persons, which is or would be taxable income under the bright-line test.
This tax is intended to support the bright-line test, and is to apply from 1 July 2016.
The withholding tax applies to residential land located in New Zealand, however, there will be no exception for the seller’s main home, as an offshore person is unlikely to live in the home. However, the exemption for transfers on death or in relation to relationship property agreements will apply.
The obligation to deduct the tax will initially fall on the seller’s lawyer, as the paying agent. If the seller is not using a lawyer, the obligation then falls to the purchaser’s lawyer. In the absence of any lawyer, the obligation will fall to the purchaser.
Where the seller and buyer are associated persons, the purchaser must withhold the tax, as the withholding agent.
The paying agent will be considered the seller’s agent for the purpose of this tax, and will not be liable for the tax itself, which is normally the position for agents. The paying agent will be liable though if they deduct the tax and do not pay it to the IRD.
The amount required to be deducted is the lower of 33% (28% if a company) of the simple gain on sale, or 10% of the sale price. In calculating the gain, no costs of acquisition or disposal are taken into account.
The tax will be paid before other deductions such as legal fees, except where the seller’s lawyer is the paying agent – in this case, the lawyer is able to pay off the mortgage funded by a New Zealand registered bank or a licensed non-bank deposit taker.
If there are insufficient funds to pay the tax once the mortgage is paid, the tax will be reduced to the surplus available.
Standard penalties will apply except, in the case of a paying agent, late payment penalties will not apply where the tax has not been retained by the paying agent.
Paying agents who do not comply with their obligations to deduct the tax may be reported to their professional body.
The tax is only required to be deducted from the “residential land purchase amount” which is the amount due on the disposal of the land, excluding deposits and part payments, provided that any deposits and part payments do not exceed 50% of the sale price of the land.
The due date for payment to the IRD is the 20th of the month following deduction, however, payment may be made earlier in order for the seller to obtain a refund. A refund will be able to be used to pay income tax due on other taxable income. A refund is not available until the tax has been paid.
The tax is not a final tax, and will be a credit against the seller’s final income tax liability.
Taxpayers will be able to file an interim income tax return in respect of income from the sale of residential land taxable under the bright-line test. A refund is only possible in respect of the withholding tax – however, the income tax will not be final until the end of the tax year.
Should the tax not be collected in the year the income is taxable, the tax credit will be able to be used in an earlier year.
A feature of the proposed tax is that should the disposal be taxable under a different land taxing section, the requirement to deduct the withholding tax will still apply.
Who does this affect?
The tax only applies to offshore persons. An individual will be an offshore person if they are not a New Zealand citizen or do not hold a resident visa or permanent resident visa.
A New Zealand citizen will be an offshore person if they have not been present in New Zealand within the last three years. A residence visa holder will be an offshore person if they have not been present in New Zealand within the previous 12 months.
A New Zealand citizen or residence visa holder may have difficulty proving they have been present in New Zealand if they are not present in New Zealand at the time of sale. A certified statement or other proof such as travel tickets should be provided to the paying agent.
If the residential land is co-owned but only one owner is an offshore person then the tax will still need to be deducted.
For a company (or unit trust) to qualify for the non-offshore exemption, all of the following must be met:
• the company is registered in New Zealand;
• all directors and executives are nonoffshore individuals; and
• no more than 25% of the shareholder decision-making rights are held by offshore persons.
The IRD suggests that these requirements could be proved by a copy of the New Zealand registration, sighting a copy of each director’s and executive’s New Zealand passport or residence class visa, and a statement from each director that, to their knowledge, no more than 25% of the shareholder decision-making rights are held by offshore persons.
A partnership will be an offshore person if one of the partners is an offshore person.
For a trust, the rules are far more complicated and if any of the following apply the trust will be an offshore person:
• the trustee is an offshore person;
• the trustee has a co-trustee who is an offshore person;
• a settlor is an offshore person;
• all natural person beneficiaries are offshore persons;
• all beneficiaries and all discretionary beneficiaries are offshore persons; or
• a beneficiary who is an offshore person has received a distribution from the trust within the last six years of a relevant disposition of residential land.
A corporate trustee will need to meet both the company and trust criteria for the exemption to apply.
There are information requirements that will need to be complied with. The vendor is required to provide information to the IRD, including whether they are an offshore person and whether they are associated with the purchaser. Certified copies of documents will be required.
Paying agents and withholding agents will be required to provide statements detailing their tax obligations to the Commissioner.
There is a seven-year rule for the retention of records for anyone who receives information, and this applies irrespective of whether the tax is ultimately paid or not.
What are the issues?
The draft legislation presents a number of issues.
First, there is the increased complexity and compliance involved. Vendors will need to prove they are not offshore persons and will need to file interim tax returns to get refunds of excess tax deducted.
Their costs will increase as there will be more work for lawyers who have to administer the withholding process, and accountants will be required to compile income tax returns.
Further, determining whether the seller and buyer for tax purposes are associated is often quite complex to determine. However, there are clear obligations on the purchaser when association is present.
The actual withholding tax in every situation will be more than the actual tax owed, if any. This is because the withholding tax calculation does not allow for costs of acquisition, costs of disposal, any improvements, or any existing losses. Or, in the case of a resident co-owner, they may not be liable for the tax at all. There is no reason why the tax could not be allocated on a percentage of ownership basis. This would save all the extra costs of recovering the refund, not to mention the opportunity cost of the use of the money.
The government is essentially receiving a loan from taxpayers for the overtaxing, and the taxpayers receive only a small amount of interest (which is subject to tax), in compensation.
A much fairer way would be to reduce the amount of the withholding tax to a level which allows for these deductions.
It is not unusual for New Zealand companies to have relatively small shareholdings held by offshore persons – we are a trading nation after all. If these companies have only a minority offshore shareholding they will need to comply with the withholding requirement even though they are essentially New Zealand companies.
It is even more commonplace to have an overseas director, so even if the company is solely owned by New Zealand residents, it will be subject to the withholding tax.
This will be particularly irritating to land-dealing or development companies that are predominantly New Zealand owned but are offshore persons for this tax. Every time a sale is made, these companies will need to lodge an interim tax return in order to get their overpayment of tax back.
What is not clear from the definition is whether the withholding tax applies only to the GST exclusive amounts. If the amounts are GST inclusive this would lead to inaccurate amounts being deducted.
Lenders who are not banks or licensed non-bank deposit takers will find their security has been eroded as the withholding tax will need to be paid first. This will particularly affect related-party funding.
The Bill is now with the select committee. It is to be hoped that the select committee will carefully consider these issues, and make amendments so the tax is not only more workable, but also fair.
Note: ADLS’s Property Law Committee also wrote about this topic last year in Issue 33, 25 September 2015. The Committee has recently made submissions on the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill and the Regulatory Systems Bill. Both submissions can be viewed under the Property Law Committee’s tab on the ADLS website.
The first will introduce a residential land withholding tax from 1 July 2016 which will have a significant impact upon conveyancing practice in New Zealand. The second submission addresses planned amendments to the Unit Titles Act 2010 which are included in the Regulatory Systems Bill. Further updates will be provided in due course.