After 1 July, many New Zealand companies, partnerships and trusts with an overseas connection will be subject to residential land withholding tax (RLWT) of up to 33% if they sell residential property within two years of acquisition.
Property developers will be able to obtain a certificate of exemption in limited circumstances.
Imagine that a family trust sells a residential property on 30 September 2016 for $1.2 million. The trust acquired the property on 1 November 2015 for $700,000 and spent $300,000 to do it up. Their lawyer informs them that they must withhold tax of $120,000 and pay it directly to Inland Revenue before they receive a single dollar.
This outcome, however surprising, may be the result under the new RLWT rules expected to become effective on 1 July.1
If, for example, the settlors’ daughter had been on her OE for more than three years without coming back to New Zealand, and received a distribution of more than $5,000 from the trust in one of the last four years, the trust is an offshore trust for RLWT, and the sale of the property is subject to the RLWT rules.
The Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill (the Bill), which is awaiting royal assent, introduces RLWT as a mechanism to collect the tax due under the new residential property 2-year bright-line test (which took effect from 1 October 2015) from “offshore RLWT persons”. Our example is one of many situations where a New Zealand company, partnership or trust will be treated as an offshore RLWT person.
Offshore RLWT person
The definition of “offshore RLWT person” is wider than the definition of “offshore person” in the Overseas Investment Act and under the recently enacted property tax statements regime. Even where the owner of a property appears to be in New Zealand, it will be necessary for conveyancing agents to ask their clients detailed questions about their factual circumstances to determine whether RLWT applies.
An individual will be an “offshore RLWT person” if he or she:
- is a New Zealand citizen who has not been in New Zealand within the last three years
- holds a residence class visa and has not been in New Zealand within the last 12 months, or
- is not a New Zealand citizen and does not hold a residence class visa.
A company or partnership will be an “offshore RLWT person” if:
- it is incorporated or registered outside New Zealand or constituted under foreign law
- it is controlled (directly or indirectly) by more than 25% offshore RLWT persons, or
- more than 25% of its directors or general partners are offshore RLWT persons.
Many New Zealand companies will be caught by these rules. For example, a New Zealand company with three directors, one of whom is Australian, could mean the company is subject to the RLWT rules. New Zealand subsidiaries of multinationals will almost certainly be “offshore RLWT persons”.
The rules applying to trusts are even broader. In addition to looking at the offshore status of each of the trustees, settlors and beneficiaries – any of whom could result in “offshore RLWT person” status for the trust – the RLWT rules will apply to a trust where:
- a beneficiary who is an individual and an offshore RLWT person who has received a distribution from the trust in one of the last four years of more than $5,000, or
- the trust has disposed of any other residential land within the last four years and the trust has any beneficiary that is an offshore RLWT person (even if no distributions have been made from the trust).
RLWT in brief
Broadly speaking the RLWT regime will require a conveyancing agent for an offshore RLWT person selling residential property to withhold RLWT from the purchase price and pay it to Inland Revenue before releasing funds where:
- the property is residential property (which includes bare land zoned residential) located in New Zealand, and
- the property is disposed of within two years of acquisition (provided the property was acquired on or after 1 October 2015).
Where RLWT applies, the vendor’s conveyancing agent is required to withhold the lesser of:
- 33% (or 28% in the case of companies) of the vendor’s gain, or
- 10% of the vendor’s gross sales price.
The vendor’s gain is calculated solely based on the current sales price less the original purchase price. Improvements and other deductible expenses are not included in calculating the gain subject to RLWT.
New Zealand mortgages and local authority rates are paid out ahead of RLWT, but RLWT takes priority over any other claims – including offshore lenders. If the acquisition of residential property is financed by offshore borrowing, RLWT obligations could prevent settlement unless the vendor can separately satisfy their offshore debt with alternative funds.
RLWT is an interim tax and vendors may be eligible for a refund on overwitheld tax. Vendors may file interim tax returns to allow the Commissioner to refund some or all of the RLWT if it would result in over-taxation, if the taxpayer had sufficient losses carried forward, or if the disposal of the land was not in fact subject to tax.
In the case of vendors who are companies, partnerships or trusts, one New Zealand director, general partner or trustee will be required to determine and certify the offshore RLWT person status of the vendor to show that the entity is not an offshore RLWT person. If this certification is not provided, the conveyancing agent will be required to withhold RLWT. Given the complexity of the rules many directors, partners and trustees will need assistance from their advisors to determine whether they are “offshore” for RLWT purposes.
Certificates of exemption
Certificates of exemption from RLWT will be available in limited circumstances, such as:
- for a residential property developer if it has a good compliance history with Inland Revenue or it provides a security interest to Inland Revenue, or
- where the property is the vendor’s “main home”.
RLWT exemption certificates are different from resident withholding tax (RWT) exemption certificates. RLWT exemption certificates will not automatically be granted to RWT certificate holders.
It is unlikely Inland Revenue will have procedures in place to issue certificates of exemption from 1 July, so developers should anticipate having RLWT apply to sales in July/August of this year.