Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill
On 21 March 2016, the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill was reported back to Parliament. An Officials’ Report was published addressing the submissions received on the Bill.
Law News readers may recall that ADLS’s Property Law Committee gave both written and oral submissions on the Bill earlier in the year to Parliament’s Finance and Expenditure Committee. The Bill addresses three areas but the Committee submitted only in respect of the Residential Land Withholding Tax (RLWT) aspect. This article will briefly summarise how some of the Committee’s key submissions faired.
RLWT is a new withholding tax to be applied on the sale of residential property by offshore vendors. This is being introduced because of concerns about the ability of Inland Revenue to collect tax where the vendor has limited presence in New Zealand. Therefore, RLWT should only apply to a small number of residential property sales in New Zealand. These measures are being introduced to complement the new bright line test.
RLWT will apply to the sale of residential property where property:
• was acquired on or after 1 October 2015;
• was owned for less than two years before selling; and
• the seller is an “offshore person”.
On 21 March, an Officials’ Report was published which reported back on the submissions received on the Bill. The Report contains 73 pages of issues that were raised by the various submitters. The Officials’ Report can be accessed at http://taxpolicy.ird.govt.nz/sites/default/files/2016-or-rlwtgstossl.pdf.
Some of ADLS’s key submissions are summarised below.
ADLS submitted that the RLWT will increase the cost of conveyancing for people dealing in land. The report acknowledged that the tax will increase costs but noted that the benefits the RLWT measures will bring to the wider tax system outweigh the increase in costs that will be experienced.
Directors – “offshore person” definition
In terms of the debate over director requirements and the definition of an “offshore person, ADLS submitted as follows:
“The requirement for directors should be limited to a requirement for the majority of the directors to be New Zealand-based in order to not be an offshore person. There will be some companies that are clearly domiciled in New Zealand and are New Zealand taxpayers, but that may have an offshore director. It is likely to be damaging to New Zealand industry to exclude all overseas-based individuals as directors. It is not uncommon for such directors to bring an expertise/experience that is not readily available from within New Zealand.”
The Report accepted ADLS’s submission and has recommended a change so that a company will only be offshore if more than 25% of directors are offshore. 25% has been selected so as to be consistent with the approach taken in the Overseas Investment Act 2005.
Trusts – “settlors” and “beneficiaries”
ADLS submitted that the way the Bill addressed “settlors” and “beneficiaries” of trusts was insufficient and misguided. The Report has accepted these criticisms and proposed revised definitions that will better achieve what the legislation is aiming to accomplish.
Negative impact on the development of new housing
One of ADLS’s key submissions concerned the development of residential housing and was as follows:
“The development of residential housing in New Zealand is not only carried out by New Zealanders but also by offshore persons. Historically, offshore persons have developed property in New Zealand and paid their tax. If the new legislation does not include an exemption for these people of good repute and requires them to pay RLWT on each transaction that comes within the bright line test these developers will suffer serious cashflow consequences. Cashflow is of course a critical element for any property developer and given the inability to offset costs when the RLWT is paid this new regime will act as a major clog on the development of residential property in New Zealand.”
The report acknowledged the unintended consequences that the RLWT might have on new housing development and noted the importance of new housing development at the present time. The report follows the Committee’s submissions by proposing an exemption scheme for bona fide offshore developers. For offshore developers who are unknown quantities to Inland Revenue, a bond system is being explored, as was also suggested by ADLS. Speculators and/or renovators will not qualify for these exemptions.
Priorities – fees
ADLS recommended that the draft Bill be clarified to confirm that RLWT does not take priority over legal fees and real estate agents’ commission. This would have allowed for the current practice of the agent’s commission being taken from the initial deposit to continue.
However, the submission has been declined on the grounds that this may create an opportunity for offshore sellers to evade their New Zealand tax liability by “gaming” the system.
Real estate agents’ fees will not take priority over RLWT. This will be a major concern for agents who operate on commission and rely on receiving it from the deposit.
The Report has recommended that local authority rates along with mortgages (which already had priority under the original Bill) take priority over the RLWT.
ADLS requested that there be dedicated resources within Inland Revenue to provide support to paying agents (lawyers) who are making assessments and require assistance. The report confirmed that full examples, guidance materials and an online calculator will be provided by the IRD to assist lawyers making assessments.
Penalties arising from the regime
ADLS submitted that any penalties imposed are deemed to be “civil” penalties rather than “criminal”. If the penalty is deemed to be “criminal”, it is likely to impact on the lawyer’s ability to continue to practise law. ADLS also sought clarification on what was meant by “reasonable care” under the act in relation to a lawyer’s assessment of whether RLWT was owing.
The report confirmed that generally the penalties will be civil but that criminal penalties will be possible in rare and exceptional cases but will be court-imposed. With regard to “reasonable care”, the report agrees with ADLS and recommends that it should be clarified in the legislation and added that further guidance will be provided.
Bryce Town and Joanna Pidgeon led the Property Law Committee’s submissions on the Bill and deserve much of the credit for the positive outcomes that have been achieved.