Article: Law & Finance

Recent Tax Reforms Relating To Land.  What Are They? with Ian ReevesRecent Tax Reforms Relating To Land.  What Are They? with Ian Reeves

1.New Disclosure Rules

Now a statement must be signed by all sellers of land (not just residential land) as information gathering for the government.  Some information on the statement is not required if it is a main home, inherited land, or a mortgagee sale. 

2.  “Brightline Test” For Taxation On Residential Land Sales

This is a new tax on residential land sales, applying since 1 October 2015, and sold within 2 years.  It is designed to reduce “churn” or speculation, mainly in the Auckland market. 

It does not apply to business premises or farmland.

There are exceptions.  The main home is an exception, but an “habitual seller” can’t claim it.  The exception can apply to trusts, if it is the beneficiary’s main home for most of the time the trust owns the land. 

Relationship property transfers is an exception; as is inherited land. 

The Brightline test generally applies to lifestyle blocks, as being residential land.
Losses on sale of a property are ring-fenced, and can only be used against profits from similar land transactions, not other income.

3.  Residential Land Withholding Tax (Rlwt)

The RLWT is to ensure offshore persons pay income tax due under the Brightline test.  Part of the sale proceeds are paid to IRD by the seller’s lawyer, as a prepayment or bond against possible income.

It applies from 1 July 2016 where the seller is an “offshore RLWT person” of residential land in NZ, which is subject to the Brightline test i.e. within two years (and no exception for main home).

An “offshore RLWT person” includes:
• An individual who is not an NZ citizen and does not hold an NZ residents class

• A NZ citizen living outside NZ, who has not been in NZ within the last three years.

• A holder of an NZ resident class Visa living outside NZ, and who has not been in
NZ within the last 12 months.

• Partnerships and co-ownerships - each of the individuals to be assessed. 

• NZ companies if more than 25% of the directors or shareholders are offshore
RLWT persons.

• Trusts have a number of categories for them to be included e.g. where offshore
trustees or beneficiaries are involved.

The withholding tax is the lesser of:

• 33% of the seller’s gain (or 28% if the seller is a company); and

• 10% of the amount paid by the purchaser for the property.

The seller can file an interim income tax return, and obtain a refund from the IRD.

For sales of residential land, purchased after 1 October 2015, and owned for less than two years, a RLWT declaration must be signed by the seller, even if clearly a New Zealand citizen.  If the seller is able to sign the statutory declaration that the seller is not an offshore person, then there is no obligation to withhold tax.

Ian Reeves is a Director at Henderson Reeves Lawyers.  You can contact him on 09 430 4340.

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