RLWT and “offshore persons” – some surprises
The RLWT rules apply where the vendor is an “offshore RLWT person”. These rules are complex and will apply in some quite unexpected situations. Lawyers and conveyancers need to be familiar with these rules or they may face IRD penalties.
Every vendor of residential land which was acquired on or after 1 October 2015 and that is disposed of within two years will need to complete a RLWT declaration form prior to settlement. In that declaration, they need to confirm whether or not they are an offshore RLWT person and provide evidence in support.
The definitions of who is an “offshore RLWT person” are complex and differ from that of the “offshore person” definitions for the purposes of the tax statement information which is required in the settlement process.
A natural person is an offshore RLWT person if:
- they are a New Zealand citizen who is out of New Zealand and they have not been in New Zealand at any time in the last three years;
- they hold a residence class visa and are out of the country and they have not been in New Zealand at any time in the last 12 months; or
- they are not a New Zealand citizen and do not hold a residence class visa.
A company or limited partnership will be an offshore RLWT person if:
- the entity is incorporated, registered or constituted under a foreign law;
- more than 25% of the directors are offshore RLWT persons or more than 25% of the shareholding decision making rights or effective look-through interests (in the case of an LTC) are held by offshore RLWT persons; or
- more than 25% of the general partners are offshore RLWT persons or more than 25% of the partnership shares are held or controlled by offshore RLWT persons.
Many New Zealand discretionary trusts will be regarded as an offshore RLWT person and may find that they have an RLWT liability. A trust will be regarded as an offshore RLWT person if:
- more than 25% of the trustees or the persons who hold the power to appoint or remove trustees or the power to amend the trust deed are offshore RLWT persons; or
- all beneficiaries or all natural person beneficiaries are offshore RLWT persons; or
- a non-natural person beneficiary that is an offshore RLWT person has received a distribution in one of the last four years before the disposal; or
- a natural person beneficiary who is an offshore RLWT person has received a distribution of more than $5,000 in one of the last four years before the disposal; or
- the trust has disposed of residential land within four years of the disposal and the trust has an offshore RLWT person beneficiary.
These last three categories may result in many discretionary trusts which would otherwise be considered to be onshore entities being classified as an offshore RLWT person.
Take for example, a discretionary trust that has mum and dad as settlors who also hold the power of appointment and are trustees together with an independent trustee. The beneficiaries of the trust are the settlors, adult children and grandchildren. All are New Zealand citizens. However, one of the adult children lives in the UK and has not been back in New Zealand for three years and is therefore an offshore RLWT person beneficiary.
The trust sold the family home three years ago when the parents down-sized. The trust also bought an investment property in November 2015. The trust has entered into a sale and purchase agreement in respect of the investment property and settlement is on 1 July 2016. Because the adult child is an offshore RLWT person, and there has been a disposal of residential land in the preceding four years, the trust will be an offshore RLWT person and there will be a requirement to deduct RLWT from the settlement monies on 1 July 2016.
Conveyancers’ “know your client” processes will be even more important post-1 July. For trusts, conveyancers will need to know:
- whether any of the trustees, appointors or person with the power to amend the trust deed are offshore RLWT persons;
- if any capital or income distributions have been made to beneficiaries in the last four years to offshore RLWT person beneficiaries;
- if the trust has disposed of any residential land in the last four years (prior to the current disposal).
Certificates of exemption – relief for developers that qualify
In relation to developers, the RLWT calculations do not take into account any development or holding costs and so the RLWT liability will in most cases be more than the final tax liability on the income. Therefore, the RLWT will have a significant cash flow impact for these businesses.
Some vendors may now be able to apply for a certificate of exemption from RLWT if certain criteria are met. A certificate of exemption may be able to be applied for if:
- the person is in the business of developing, subdividing or erecting buildings and a security acceptable to the IRD is provided or the person has had tax obligations and has complied with all tax obligations for two years prior; or
- the person satisfies the main home exemption to the bright-line test.
According to the recently released IR1103 form (“Application for exemption from residential land withholding tax (RLWT)”), the security required may be in the form of a bank bond, mortgage against real property, surety or bond from a finance entity or insurance provider, and will be for an amount that is the greater of $50,000 or 10 per cent of the estimated turnover for the sale of properties for which the exemption applies. In addition, the IRD requires a schedule of property-related income and costs to be provided.
Developers, subdividers or builders who have a good tax record for two years can also apply, although the requirement to meet all tax obligations includes GST, Kiwisaver, PAYE etc., and therefore clients will need to ensure that they are up to date on all aspects of their tax affairs before making the application. Property dealers (i.e. who buy and sell property as is) are not eligible to apply for an exemption certificate.
Conveyancers will need to be familiar with the main home exemption in section CB 16A of the Income Tax Act 2007 which forms part of the bright-line rules to determine whether or not an application can be made on the basis that the property is the vendor’s main home. These rules are complex and require rigorous scrutiny of how the property has been used.
The IRD has indicated that it will take 15 working days to process exemption certificate applications. Time will be of the essence in making an exemption certificate application as only clients who hold an exemption certificate at settlement are exempt from RLWT.
A brave new RLWT world
The introduction of the tax statement information, bright-line test and new RLWT rules represents a new world for conveyancers. Conveyancers will be at the coalface of interpreting and applying tax law in their day to day practice and may face IRD penalties if they get it wrong. The relationship between client, solicitor and the client’s accountant and tax advisor will be ever more important.
Amanda Martin is a tax advisor at nsaTax Limited, a tax specialist CA firm that advises lawyers, accountants and private clients on all areas of taxation law. Ms Martin has presented extensively on RLWT and the recent property tax reforms.