RLWT – New obligations will be time-consuming for lawyers
The introduction of the residential land withholding tax (RLWT) placed significant and onerous responsibilities on lawyers acting on the transfer of residential land from 1 July 2016.
Essentially, RLWT will need to be deducted:
- where residential land is sold in New Zealand; and
- the vendor acquired the land on or after 1 October 2015; and
- the vendor has owned the land for less than two years (the “bright-line period”); and
- the vendor is an offshore RLWT person (“offshore person”).
Who is required to deduct RLWT?
The obligation to deduct the RLWT will initially fall to the vendor’s lawyer, as the “paying agent”. If the vendor 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 vendor and purchaser are associated persons, the purchaser must withhold RLWT, as the “withholding agent”. The purchaser may use the services of a lawyer to meet the purchaser’s obligations.
Lawyers will need to have an understanding of the associated persons rules to determine who has the responsibility to deduct RLWT. Alternatively, lawyers should consult the client’s chartered accountant for assistance.
The paying agent will be considered the vendor’s agent for the purpose of RLWT, but will not be liable for RLWT itself, which is normally the position for agents. The paying agent will be liable though if they deduct RLWT and do not pay RLWT to the IRD. However, in the case of a withholding agent, they can be liable for RLWT.
The greatest risk for lawyers is not deducting RLWT when there was a requirement to do so. Therefore, lawyers will need to have robust processes in place to mitigate this risk. Overall, lawyers will require a good understanding of the bright-line test tax rules, and a very good understanding of the particular aspects of the RLWT rules.
Differences with the bright-line test
Under the RLWT rules, there is no exclusion for the vendor’s main home, as an offshore person is unlikely to live in the home, but if the main home exclusion test is met, the vendor may apply for a certificate of exemption from RLWT.
If another of the land-taxing sections of the Income Tax Act applies and the vendor is therefore not taxed under the bright-line rules, the vendor is still subject to RLWT (provided the other criteria are met, such as being within the bright-line period). Therefore dealers, developers, dividers and builders disposing of land are subject to the RLWT rules.
One of the most difficult parts of the RLWT rules for lawyers will be determining if the vendor is an offshore person under one of the three categories of individuals and partnerships, companies and limited partnerships, and trusts.
Trusts are likely to be the most problematic part of the offshore person definition, particularly where there is a beneficiary who meets the definition of an offshore person. I recommend lawyers work in conjunction with the client’s chartered accountant to determine what distributions or residential land sales have been made in the past four years.
With companies, care needs to be taken as to whether the ultimate shareholders are offshore persons, as this may be difficult to determine.
How much RLWT to deduct?
The amount of RLWT required to be deducted is the lower of:
- 33% (28% if a company not acting as a trustee) of the simple gain on sale; or
- 10% of the sale price; or
- the sale price less any rates owing, and less certain mortgages.
In calculating the simple gain on sale, no costs of acquisition or disposal are taken into account. The gain is the sale price, including any deposits or part-payments, less the acquisition price. These amounts include non-cash consideration. The amounts included in these calculations are net of any GST that may apply to the transaction.
Generally, no deductions are allowed before the payment of RLWT. An exception is the real estate agent’s commission which is usually taken from the deposit. Only where it is the vendor’s lawyer acting as the paying agent will a deduction be allowed for the vendor’s mortgages owed to New Zealand registered banks, and non-bank deposit takers licensed under the Nonbank Deposit Takers Act 2013.
Rates can be deducted irrespective of whether the lawyer is acting as a paying agent or withholding agent. However, there may be other deductions required to be paid as part of settlement such as the usual disbursements, body corporate levies or other loans. The IRD expects the lawyer to require the vendor to pay further amounts to the lawyer to meet these payments. While the lawyer may not be liable for any tax that is not withheld, the lawyer may be exposed to shortfall penalties, depending on culpability.
On what amounts is RLWT to be deducted?
The “residential land purchase amount” is the amounts paid or payable on the sale of residential land, but excludes deposits and part-payments as long as the deposits and part-payments are less than 50% of the sale price. The requirement to deduct RLWT will arise as soon as the 50% threshold is reached. Usually this is at settlement, however, where there are a number of part-payments, the threshold may be reached prior to settlement. In these situations, the RLWT is paid in instalments and the amount of RLWT is capped at the amount of each part-payment.
Reliance on client-provided information?
Lawyers acting as paying agents are able to “reasonable rely” on information provided to them by the vendor. This ability does not extend to withholding agents.
The vendor is required to provide the necessary information to their paying or withholding agent, to enable the agent to fulfil their obligations. The form to use is an IR1101. This form is required if the vendor sells residential land within the bright-line period, and the vendor is required to declare whether RLWT applies to the disposal. The agent is required to check whether RLWT does apply, particularly where a paying agent is to reasonably rely on the information provided by the vendor.
The IRD expects that the agent will be easily able to determine whether the disposal is within the two year bright-line period, as the date of original transfer to the seller should in most standard situations be available from Landonline. Where the agent is unable to find the title registration date, the agent should ask the seller for the date (and the documentation surrounding the purchase if the paying agent is to reasonably rely on the information).
The IRD expects where a vendor does not provide the date that the agent should assume it is in the bright-line test period. The end date for the bright-line test for most disposals will be the date the sale and purchase agreement is signed, irrespective of whether it is a conditional contract or not. If the agent decides that the sale is outside the bright-line period, the vendor does not need to provide any further information. If the agent decides the sale is within the brightline period, then the vendor is required to provide further information and documentation.
The law requires information to be provided if the vendor’s bright-line period is within two years, however, the IRD suggests it might be easier to complete the form IR1101 in full because, in order for RLWT to apply, it may be easier to decide whether the vendor is an offshore person, or whether the land is residential land.
For instance, it may be very easy to determine if the vendor is not an offshore person. By meeting the vendor the lawyer can sight the vendor’s passport or residence class visa and can confirm the vendor’s physical presence in New Zealand. The lawyer should take a copy of the passport or visa. Where the vendor does not have a passport, then a birth certificate and government-issued photographic identification is required. This will be sufficient evidence for the lawyer to determine the vendor is not an offshore person.
A lawyer acting as paying agent can rely on the information and documents of a vendor, as long as their reliance is reasonable. If there are reasonable grounds for doubt (such as a passport appears to be altered, or the vendor does not provide evidence to support their non-offshore status), then reliance on a statement that a person is not a non-offshore person will not be reasonable.
The information required to be provided must be provided before settlement, or before 50% part-payment is made, otherwise the lawyer may assume the vendor is an offshore person, and withhold the RLWT, if the other criteria for withholding apply. An exception here would be where the vendor has been a long-standing client of the lawyer, who knows the vendor is not an offshore person.
The minimum information to be provided by the vendor to the IRD is:
- their full name and address;
- their IRD number;
- whether they are an offshore RLWT person;
- if they are an offshore RLWT person, whether they and the purchaser are associated persons and whether the disposal would be subject to RLWT – that is, if the disposal would be income under the bright-line test, ignoring the main home exclusion and other land taxing provisions.
The vendor will also need to provide relevant and appropriate documents to support this information. Vendors need to be aware that knowingly providing false information could expose the vendor to criminal penalties. If the vendor states they are an offshore person, there is no need for documents and evidence to support the vendor’s assertion.
Where the vendor is unable to meet the paying agent in person, a certified copy of their passport or residence class visa will be required, along with evidence of being present in New Zealand during the relevant period. Where there are a number of vendors, each vendor needs to provide their own information in their own IR1101.
For a non-natural vendor to claim they are not an offshore person, then the information and documents to be provided must be verified by a natural person who is not an offshore person and is:
- a director of the selling company;
- a general partner of the selling limited partnership; or
- a trustee of the selling trust.
A paying agent can rely on the director, general partner or trustee’s statement provided they have satisfied themselves that the person making the statement is not an offshore person. If no director, general partner or trustee who is not an offshore person can verify the information then the information can not be relied upon.
In the case of a mortgagee sale, the mortgagor is still required to provide the information.
Providing a return to the IRD
The paying agent or withholding agent is required to provide a statement to the IRD (an IR1100) and this statement will include:
- the IRD number of the taxpayer;
- the amount of withholding tax calculated;
- the amount actually withheld and paid to the IRD;
- the Certificate of Title numbers; and
- the method used to calculate RLWT.
If the amount calculated results in a nil amount (for instance due to the deduction for a mortgage), the agent must still provide a statement to the IRD.
There is a seven year rule for the retention of records for anyone who receives information, and this applies irrespective of whether RLWT is ultimately paid or not.
Penalties will apply
Both paying agents and withholding agents will be subject to the usual penalties. If there are insufficient funds available to pay the full amount of RLWT, the IRD expects the vendor to pay additional funds to ensure the RLWT is paid. If a paying agent fails to retain an amount of RLWT because they reasonably relied on the information provided to them by the vendor, then the paying agent is not liable for a penalty. The main civil penalties are the shortfall penalties, which range from not taking reasonable care to evasion.
Where an amount of RLWT deducted and paid is less than the amount required to be paid as calculated using the three methods, a penalty may apply depending on culpability. The IRD expects the lawyer to write to the IRD explaining the shortfall. Late payment penalties will apply automatically to amounts that should have been paid. In the case of a paying agent late payment penalties will not apply where the RLWT has not been retained by the paying agent, but will become the vendor’s liability. If the paying agent has deducted the RLWT, but not paid the tax to the IRD, then late payment penalties will apply. Interest will apply to late payments. Late filing penalties will apply to the late filing of statements with the IRD. Criminal penalties can also apply in particular circumstances. Paying agents who do not comply with their obligations to deduct RLWT may be reported to their professional body.
Claiming a refund
The due date for payment of RLWT to the IRD is the 20th of the month following deduction, however, payment may be made earlier on a transaction-by-transaction basis in order for the vendor to obtain a refund.
Taxpayers will be able to file an interim income tax return in respect of income from the sale of land. The form to use is IR1102. A refund is only possible in respect of the RLWT. An interim return may be lodged even if a taxpayer is eligible for a certificate of exemption. A refund will be able to be used to pay income tax due on other taxable income however a refund is not available until the RLWT has been paid. A refund will not be made if other tax debts are owed.
The RLWT deducted is not a final tax, and will be a credit against the vendor’s final income tax liability. Any income tax owing will not be a final tax until an income tax return is lodged at the end of the tax year. An amount deducted by the paying agent will be the amount of tax credit available, even if for some reason the paying agent does not pay the entire amount of tax deducted, to the IRD. 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. The surplus credit is based on using the highest marginal tax rate for individuals, and the trust tax rate for trusts, and the company tax rate for companies.
Anyone wishing to make an interim claim will need to provide the information required by the IRD. This will include details of income and deductions relating to land up until one month after the disposal of land for which the RLWT has been deducted. Accordingly, details of any other disposals of land will need to be provided. A taxpayer who qualifies for the main home exclusion would state this in the interim return.
Clearly, the obligations lawyers have under the RLWT rules will mean that the time required of them to undertake their work will increase quite significantly, as well as spending time learning the new rules. Internal processes will need to be robust to ensure RLWT is deducted where legally required. Lawyers will bear the brunt of having to enforce the law and deal with unhappy clients who may well not be aware that they are caught under the rules. Therefore, clients may be under stress as the implications of RLWT may place them in circumstances where they will have difficulty completing a sale or face serious cash flow pressures.
Lawyers will need to consider RLWT in relation to transactions as soon as possible as time may be required to obtain a certificate of exemption, and the information needed to prove that the vendor is not an offshore person. Vendors may need time to find additional funds to settle, and may need time to organise the funding needed. Lawyers should review their engagement terms and consider whether the terms are sufficient to recover costs and penalties incurred in undertaking their work. Lawyers should work with chartered accountants where necessary for assistance with accounting and tax issues such as the associated persons test, applying for a certificate of exemption, and completing interim income tax returns.