Changes to the tax regime affecting property transactions

The NZ government has recently taken legislative steps with the stated objectives of: collecting more information about property buyers and sellers; improving tax compliance; and cooling the heated property market.

Some measures are in place and others are well on the way.  This article covers each of those measures.

Tax information regime

On 1 October 2015 the Land Transfer Amendment Act 2015 came into force. 

For agreements dated after 1 October 2015, there is now a requirement that people buying and selling property must provide a completed Land Transfer Tax Statement.

The Tax Statement must include the following information:

• The name of the buyer/seller;
• Whether the land has a home on it;
• Whether the buyer/seller or a member of their immediate family is a NZ citizen or visa-holder; and
• If the buyer or their immediate family has a work or student visa and whether they intend living in the property.

Some sellers and buyers will also have to give:

• Their IRD number; and
• Their tax number in another country (if they have one).

A natural person who is buying/selling their main home can claim the “main home exemption” and does not need to provide their IRD number (and overseas tax information).  However, this exemption can only be used twice in two years (discussed further below under the Bright-line Test).

Any trust, company or overseas person must provide an IRD number (and overseas tax information) and cannot claim the main home exemption.  This will mean that previously unregistered people or entities must obtain an IRD number in order to sell or buy property.

The Tax Statements are given to Land Information New Zealand (as part of the process to change land ownership), who pass the information on to the Inland Revenue Department (“IRD”).  The IRD may use this information to identify those people who have a pattern of property trading and who possibly should be paying tax on any gains accrued as a result of such property trades.

Bright-line test

Another recent law change is the so-called “bright-line test”.  The Taxation (Bright-line Test for Residential Land) Act 2015 came into force on 16 November 2015.

This regime requires tax to be paid on any income made from residential property that is sold within two years of acquisition.  This is intended to supplement the existing rule that gains from the sale of land are taxable if the land was bought with the intention to sell.

Not all sales will trigger this tax obligation.  The following transactions will be exempt:

• Sale and purchase of the main home;
• Disposal of property by the executors of an estate; and
• Transfers under a relationship property agreement.

The main home exemption can only be used twice in two years.  If a person buys and then sells their third main home in two years, they will be assessed for tax on the gains of their third home.

Residential land withholding tax

The third aspect of this suite of legislative changes is the proposed withholding tax on sales of residential property by people who live overseas.  This is to come into force on 1 July 2016.

This will catch “offshore persons” who sell residential land in NZ, that they acquired on or after 1 October 2015, and that they have owned for less than two years.  There is no “main home” exemption.  This is a collection mechanism for the bright-line test as it applies to offshore persons.

“Offshore persons” will include:

• People who are not NZ citizens;
• People who do not hold a residence class visa; and
• NZ citizens and residence class visa holders who have been away from NZ for a significant period of time (three years in the case of NZ citizens).

“Offshore persons” selling NZ residential property must pay a tax on any gains they have made from the sale.  The tax is collected and paid on their behalf by their “conveyancing agent” (for example, the lawyer handling the sale).

The tax paid is the lesser of:

• A specified percentage of the gain on the property;
• 10% of the sale price of the property; or
• The amount left after repaying any mortgage and rates for the property.

 Summary

The new tax information regime is designed to give the IRD a better insight into property transactions on the back of concerns that not all property traders are meeting their tax obligations.

The Government has been at pains to stress that the regime will not affect the main home of ordinary New Zealanders.  Nevertheless, the new and proposed rules are complex and care will be needed around settlement to ensure buyers and sellers are disclosing the correct information, complying with existing and new property trading taxation obligations and, if an overseas person, meeting the proposed withholding tax requirements. 

If you are in any doubt as to the tax implications of these changes for you, please speak to your accountant and/or your usual McCaw Lewis contact.