Tax and Property Dealing Guidance on Recent Reforms. Tax statements, the bright-line test and residential land withholding tax

Transcription

1 Tax and Property Dealing Guidance on Recent Reforms Tax statements, the bright-line test and residential land withholding tax May 2018

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3 Contents Introduction 2 1. Tax statement rules 3 Tax statement rules apply to any Specified Estate in Land : Not just to residential property Tax statements Non-notifiable transfer tax statement Tax information tax statement Offshore person Errors, Offences and Retention Key points to bear in mind 2. Bright-line test 8 Application What is residential land? Measuring the bright-line period Key exceptions Trusts Involuntary disposals Gains and losses Land-rich companies and trusts 3. Residential Land Withholding Tax 12 RLWT and the bright-line test What is an offshore person for RLWT purposes? RLWT certificate of exemption Who pays RLWT? How much RLWT must be paid? Mortgagee sales In kind transactions/land swaps Part payments Tax credit and interim return Vendor information Issues for conveyancers in relation to vendor information Receiverships, liquidations and bankruptcy Suggested checklist 3

4 Introduction In 2015 and 2016, the then National Government introduced a package of tax reforms related to land dealing activities. These were: A requirement for parties involved in any transfer of land to provide tax statements (effective from 1 October 2015); A specific income tax provision for gains realised from the sale of residential land within two years of its acquisition ("brightline test") (also effective from 1 October 2015); and A residential land withholding tax (RLWT) to buttress the bright-line test (effective from 1 July 2016). The new Labour-led Government has recently extended the brightline period to five years, with effect from 29 March Land Transfer Tax Statement Sections 156B & 156C of the Land Transfer Act 1952 You can use this form to provide the required tax details as part of registering your property transfer A separate tax statement will need to be completed for each individual or entity (non-individual/corporate) See notes (attached) for details on how to complete this form. Property Details 1. Certificate of title reference (Computer Register) 2. Instrument number of transfer to be registered (if available) 3. Does the transfer include any land that has a home on it? For this question a home is any dwelling that is mainly used as a place of residence e.g. house, apartment, unit whether tenanted, occupied or not yes no Seller / Buyer Identity 4. Is this statement for? a transferor (seller) a transferee (buyer) 5. Enter the exact name that EITHER currently appears on the title (if transferor/seller) OR will appear on the title (if transferee/buyer) A snapshot of the Land Transfer Tax Statement form court ordered sales, refer to section 5 in the notes before 2

5 1. Tax statement rules The tax statement rules are ostensibly aimed at ensuring the IRD can identify parties involved in land dealing, to ensure they pay their fair share of tax as required by the law. However, the rules clearly have other purposes, including acting as a constraint on money laundering and other criminal activity and providing statistics on the level of offshore participation in the property market. In particular, the rules require offshore persons to provide both their tax identification number in their home country and a New Zealand IRD number as part of the tax information. Generally before an IRD number can be obtained, an offshore person first needs to have a New Zealand bank account. This means the person has to satisfy the relevant bank s verification of identity requirements under the Anti- Money Laundering and Countering Financing of Terrorism Act However, the Commissioner now also has the discretion to provide an offshore person without a New Zealand bank account with an IRD number if satisfied that information provided identifies the offshore person. Land Information New Zealand (LINZ) is not able to register a transfer without receipt of a tax statement from each of the transferor and transferee. However, LINZ is merely intended as a collection vehicle, as the information will not form part of the land transfer register and must be provided by LINZ to the IRD. Tax statement rules apply to any Specified Estate in Land : Not just to residential property The rules apply to transfers of all freehold estates (including fee simple and life estates), leasehold estates, stratum estates in freehold or leasehold (under the Unit Titles Act 2010) and licenses to occupy (as defined in the Land Transfer Act 2017). All such interests in land, whether residential or not, are specified estates in land, to which the rules apply. Tax statements Every transferor and every transferee needs to complete their own tax statement. The LINZ standard form is now used almost invariably, although strictly speaking use of this form is not mandatory. 3

6 The transferee s statement must, in every case, also state whether the transferee or member of his/her immediate family intends on living on the land. There are two types of tax statements, being a non-notifiable transfer or one for which tax information must be supplied. However, every tax statement needs to be dated and state: The full name (and signature) of the transferor or transferee (as applicable); Whether the transfer is of land that has a home on it (home defined for this purpose as a "dwelling mainly used as a residence"); Whether the transferor or transferee (as applicable), or a member of that person s immediate family, is a New Zealand citizen or holder of a resident visa, work visa or student visa; and Whether the transfer is a nonnotifiable transfer (either for both parties or for the person making the statement) and, if so, the category of non-notifiable transfer. The transferee s statement must, in every case, also state whether the transferee or member of his/her immediate family intends on living on the land. Non-notifiable transfer tax statement If the transfer is non-notifiable, no further information is required to complete the tax statement. Generally only a natural person (ie an individual) is able to provide such a tax statement, and this ability is restricted. Subject to the exclusions noted below, a natural person transferor provides a non-notifiable transfer tax statement where the land being transferred has been used predominantly, for most of the time owned by the transferor, for a dwelling that was the transferor s main home. A main home means the one dwelling mainly used as a residence by the person ( home ) and, if they have more than one home (as defined), the home with which the person has the greatest connection. The greatest connection concept is not defined, but IRD has stated that the factors that determine these connections would include: The time the person occupies the dwelling; Where their immediate family (if any) live; Where their social ties are strongest; The person s use of the dwelling; The person s employment, business interests and economic ties to the area where the dwelling is located; and Whether the person s personal property is in the dwelling. As IRD notes, these factors are similar to those used to determine if a person has a permanent place of abode under current case law concerning the tax residency of an individual. Therefore, IRD considers existing guidance on the permanent place of abode test should assist in determining what property the person has the greatest connection with 1. 1 New information requirements to improve tax compliance in the property investment sector", A special report from Policy and Strategy, Inland Revenue, September 2015, page 7. 4

7 Subject again to the exclusions noted below, a natural person transferee provides a non-notifiable transfer tax statement where he or she intends to use the land predominantly for a dwelling that will be the transferee s main home (as above). A natural person cannot provide a non-notifiable tax statement if they are: Providing the statement in their capacity as a trustee (so that the transfer of any family home that a trust has owned or will own is not a non-notifiable transfer); or A transferor that has claimed at least twice, within the immediately preceding two years, that he or she has made "main home" non-notifiable transfers; or An offshore person. The following transfers are also non-notifiable transfers in relation to a transferor: A transfer by a public authority or a local authority; A transfer on a distribution by an executor, administrator, or trustee of a deceased person s estate to a beneficiary who is beneficially entitled to receive the property under the will or the rules governing intestacy; A transfer of mortgaged land by the mortgagee; A transfer by rating sale under the Local Government (Rating) Act 2002; and A transfer giving effect to an order of a court. In addition, a transfer to a public authority or a local authority is a non-notifiable transfer in relation to the transferee. Tax information tax statement If the transfer does not qualify as a non-notifiable transfer for the person concerned, then the tax statement also needs to include the following tax information: The person s IRD number (in which case an IRD number must be obtained if the person does not already have one); and Whether the person is tax resident in another jurisdiction (disregarding the effect of any double tax agreement). If the person is tax resident outside New Zealand, they must also disclose the jurisdiction, the country code for that jurisdiction (prescribed by IRD) and the equivalent of the person s IRD number in that jurisdiction. Where a person is acting as (i) a nominee, or (ii) under a power of attorney, or (iii) on behalf of an unincorporated body, or (iv) in the capacity of a partner, in connection with a land transfer, the information (ie IRD number and tax residence) must relate to (i) the person who made the nomination, (ii) the person who granted the power of attorney, (iii) the unincorporated body, or (iv) the partnership. Where a person is acting as trustee, the trust s IRD number, not the trustee s own IRD number, must be provided. Many ordinary family trusts would not previously have been required to have an IRD number, but now need to obtain an IRD number before transferring or acquiring land. The rules require offshore persons to provide a New Zealand IRD number as part of the tax information. Before an IRD number can be obtained, an offshore person first needs to have a New Zealand bank account. 5

8 It is an offence to provide a tax statement that, to the person's knowledge or with intent to deceive, contains false or misleading tax information. Offshore person As mentioned above, an offshore person cannot provide a nonnotifiable transfer tax statement, and must provide the additional tax information. An individual is an offshore person if the person: Is a New Zealand citizen who is outside New Zealand and has not been in New Zealand within the 3 years immediately preceding the tax statement; Holds a residence class visa but is outside New Zealand and has not been in New Zealand within the last 12 months immediately preceding the tax statement; or Is not a New Zealand citizen and does not hold a residence class visa. Non-individuals (companies and other bodies corporate, trusts, unit trusts and other unincorporated bodies) are offshore persons if they would be an overseas person under section 7(2)(b) to (f) of the Overseas Investment Act Generally, 25% control, ownership or entitlement by an overseas person (including an individual treated as an offshore person for tax statement purposes) of or in relation to a non-individual will render the non-individual an overseas person under that Act. Errors, Offences and Retention An omission or error in any tax information provided must be corrected by completing a corrected tax statement. It is an offence to provide a tax statement that, to the person's knowledge or with intent to deceive, contains false or misleading tax information. A fine not exceeding $25,000 applies in relation to first time offences and a fine not exceeding $50,000 applies in relation to subsequent offences. LINZ and the conveyancer who provides certification in relation to a transfer must retain tax statements for 10 years, and give a copy of the statement to the Commissioner of Inland Revenue as soon as practicable after receiving a request in writing from the Commissioner. 6

9 Key points to bear in mind: 1. Clients must be made aware of the need to provide all relevant information in a timely fashion and any errors in the information provided to LINZ should be attended to as quickly as possible. 2. Offshore clients will need to be made aware of the general requirement to obtain a New Zealand bank account and IRD number well in advance of settlement. However, we note the recent relaxation of this requirement and the Commissioner s discretion to provide an IRD number to an offshore person without a New Zealand bank account if satisfied as to the applicants identity. 3. All trusts, including previously non-active trusts, will need to have an IRD number. Processing of applications by the IRD can take as long as three weeks. 4. When a trust or other unincorporated body is involved in a land transaction, each trustee of the trust or each member of the unincorporated body must separately provide tax statements. 5. Conveyancers need to be able to identify when a tax information tax statement, as opposed to a 'non-notifiable' transfer tax statement, is required. 6. Copies of all tax statements must be retained by conveyancers for at least 10 years. 7

10 2. Bright-line test Section CB 6A of the Income Tax Act 2007 (IT Act), known as the "bright-line" test, imposes income tax on any gain from residential land purchased and sold (or otherwise transferred) within five years, unless an exception applies. The rule supplements other land taxation rules in subpart CB of the IT Act, including section CB 6 which taxes gains from the disposal of any land acquired for the "purpose or intention" of disposal. Section CB 6A only applies if none of the other key taxing provisions (including section CB 6) applies. However, the bright-line test does bring within the tax net some sales that previously would not have been taxable. For example, residential land bought as a longterm investment (and not for use as the main home) will be taxable under the bright-line test if sold within five years of acquisition (eg due to a change of personal or financial circumstances), even though the gain would not be taxable under section CB 6 or other pre-existing rules. Application The original bright-line test came into force on 1 October It applied to a disposal of land if the taxpayer first acquired an estate or interest in the land on or after that date. The extended five year bright-line period was passed into law on 29 March It applies to a disposal of land if the taxpayer first acquires an interest in land on or after that date. This means the original two year bright-line period continues to apply to land in which an interest was first acquired between 1 October 2015 and 28 March 2018 (inclusive). In the vast majority of cases, a person first acquires an estate or interest in land when they enter into an agreement to purchase it, including a conditional agreement. What is residential land? The bright-line test only applies to residential land. The definition of residential land is land that has a dwelling on it, land where there is a plan or understanding to build a dwelling on it and bare land that by its area and nature is capable of having a dwelling erected on it. IRD says the latter will include bare land zoned as residential. "Dwelling" includes serviced apartments, but does not include units in rest homes and retirement villages. 8

11 Land used predominantly as business premises or farmland (including forestry, horticultural and pastoral businesses) is not residential land. "Predominant" use as business premises or farmland means the main use of the land concerned. Minor or incidental use is not sufficient. Measuring the bright-line period The period for the bright-line test (whether two years or five) spans the date of acquisition of the property (which generally differs from the first interest date) to the date of disposal. In practice, due to different tests applying for the date of acquisition and the date of disposal, the bright-line period could be regarded (from a layperson s viewpoint) as spanning more than two or five years. The date of acquisition is generally the date of registration of transfer of the land. By contrast, the date of disposal is generally the date that the seller enters into an agreement for the sale of the property (ie a conditional agreement that is subsequently settled), not the later date that the disposal is registered. This means that the date of disposal for the seller (eg conditional agreement to sell) is generally earlier than the date of acquisition of the same property by the buyer (registration of transfer). This is deliberate, to prevent the bright-line test being thwarted by sellers, merely by extending the settlement date. Special acquisition and disposal dates apply in some situations. These are summarised in the tables below (adopted from Inland Revenue's November 2015 Special Report on the Bright-line Test). Type of acquisition Standard purchase of land Sales where there is no registration of title Sales "off the plan" Subdivided land Converting a lease with a perpetual right of renewal into freehold title Type of disposal Standard purchase of land Gift Compulsory acquisition Mortgagee sale Other disposals where no contract to sell Start date of bright-line test Registration Latest date property acquired (according to ordinary rules) Date of entry into a contract to purchase The original date of registration for the undivided land Date the lease with a perpetual right of renewal is acquired End of bright-line period Date of entry into agreement for sale Date of gift (generally registration of title) Date of compulsory acquisition Date land disposed of by mortgagee Date of disposal according to ordinary rules 9

12 The bright-line test has exceptions or relief for sales of the main home, and for transfers following a relationship breakdown or death. Key exceptions The bright-line test applies to the transfer of residential land, with exceptions or relief for: The main home, being the property used predominantly, for most of the time that the seller has owned the property, as their main home. Transfer under a relationship property agreement (where a relationship breaks down). The bright-line test may apply to a subsequent disposal within two or five years of the transfer. Transfer following death to an executor, administrator or beneficiary, and subsequent disposal by those persons. In the case of transfers following death, the transfer from the deceased person to their executor or administrator, and from their executor or administrator to a beneficiary, is deemed a disposal and acquisition of residential land at the total cost of the land to the deceased person at the date of transfer (rather than at the land's market value). This ensures that while the bright-line test might ostensibly apply (depending on when the deceased person acquired the land), transfers in the course of the administration of the estate do not give rise to any taxable profit. A disposal by a beneficiary of residential land transferred to them from a deceased person's estate, or by the executor or administrator, to a non-beneficiary, is specifically excluded from the bright-line test. However, such disposals may still be subject to tax under pre-existing taxing rules in subpart CB of the IT Act. The main home exception does not apply to a sale if, within the two years immediately preceding the date of disposal, that exception has applied to two or more other sales by the same seller, or the seller has engaged in a regular pattern of acquiring and disposing of residential land. Trusts Residential land owned by a trust can qualify for the main home exception, but only if: The trust-owned property is the main home for a beneficiary of the trust; and The principal settlor of the trust does not personally own a main home or the property being sold is their main home (the principal settlor being the person who has settled the most property, by value, on the trust); and The exception has not been used more than twice in the preceding two years; and The principal settlor has not regularly acquired and disposed of residential land. Because of all these requirements, the bright-line test could have a significant impact on trusts owning a number of different residential properties occupied by various beneficiaries. 10

13 Involuntary disposals The bright-line test applies even where a disposal occurs involuntarily in the bright-line period, due to compulsory acquisition (eg under the Public Works Act 1981) or mortgagee sale. Gains and losses In determining the extent of any gain or loss, ordinary tax rules apply. As such, the person disposing of the property, whether by sale, gift or otherwise, is deemed to derive market value, where the transfer occurs for less than market value. The acquisition cost, together with incidental costs of acquisition and disposal (such as conveyancing costs and real estate commissions) are deductible in determining the net gain or loss, as are costs of improvements to the property. If a loss, rather than a gain, occurs on a disposal of residential land to which the bright-line test applies, the loss is recognised for tax purposes. However, losses are ring-fenced in that they are only able to be offset against taxable income from other land sales under either the bright-line test or any other tax rule regarding land sales in sections CB 6 to CB 15 of the IT Act. No loss is recognised on a sale to an associated person, due to concerns that losses will be engineered. Land-rich companies and trusts Anti-avoidance measures have also been implemented to prevent "land-rich" companies and trusts being used to circumvent the bright-line test. A land-rich company or trust is one where at least 50% of the value of the company or trust is attributable to residential land. The measures are intended to prevent the brightline test being avoided by selling, or changing control of, an entity, which owns residential land, rather than selling the residential land itself. 11

14 3. Residential Land Withholding Tax From 1 July 2016, a withholding tax (known as residential land withholding tax (RLWT)) applies where: Residential land located in New Zealand, acquired on or after 1 October 2015, is being disposed of; A residential land purchase amount is paid which would be income under the bright-line test in section CB 6A of the Income Tax Act 2007, ignoring section CB 6A(6) (which provides that the bright-line test applies only if none of sections CB 6 to CB 12 apply) and ignoring the main home exclusion from the brightline test; and The person disposing of the land is an offshore RLWT person, unless the person obtains an RLWT certificate of exemption. RLWT is intended to buttress the application of the bright-line test to offshore persons. There is an obvious concern that overseas owners with no connection to New Zealand will not comply with New Zealand tax filing requirements. Imposing a withholding obligation on a local party involved in the transaction (normally the vendor s conveyancer see below) addresses that compliance risk. RLWT and the bright-line test As discussed in the previous section, the bright-line test generally requires income tax to be paid on any gains from the disposal of residential land within two or five years of acquisition. The RLWT rules apply two key bright-line concepts, being: Residential land this includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, as well as bare land that can have a dwelling erected on it under the relevant district plan. Residential land does not include business premises or farmland. Two or five year bright-line period this generally starts at the point a person has title for the property transferred to them and ends at the time the person enters into a contract to sell the property. For sales off the plan the twoyear or five-year period runs from the date the person enters into a contract to buy the property to the time when a person enters into a contract to sell the property. 12

15 What is an offshore person for RLWT purposes? Individuals The test applicable to individuals is essentially the same as in the LINZ tax information measures, but the timing of the test is different. An individual will not be an offshore RLWT person only if he or she: Is a New Zealand citizen and has been in New Zealand within the past 3 years; or Holds a New Zealand residency class visa and has been in New Zealand within the past 12 months. IRD considers the personal presence in NZ must occur in the three-year (for NZ citizens) or 12-month (for holders of residence class visas) period immediately preceding payment of a residential land purchase amount. By contrast, for the LINZ tax information measures, the personal presence must occur in the period prior to date of registration of transfer. Non-individuals For LINZ tax information measures, a non-individual person (such as a partnership, trust or company), is generally an offshore person if incorporated outside New Zealand or at least 25% owned (legal or beneficial) or controlled by an offshore person. A more expansive concept applies for RLWT purposes. A nonindividual is an offshore RLWT person if it: Is incorporated or registered outside New Zealand; Is constituted under foreign law; Is a company and more than 25% of the company s directors are offshore RLWT persons or more than 25% of the company s shareholder decisionmaking rights are held directly or indirectly by offshore RLWT persons; Is a partner in a limited partnership and more than 25% of the limited partnership s general partners are offshore RLWT persons or more than 25% of the partnership s partnership shares are held directly or indirectly by offshore RLWT persons; or Is an owner of an effective look-through interest in a lookthrough company (LTC) and more than 25% of the LTC s effective look-through interests are held directly or indirectly by offshore RLWT persons. Trustees A trustee is an offshore RLWT person if: More than 25% of the trustees are offshore RLWT persons; More than 25% of those that have the power to appoint or remove a trustee, or to amend the trust deed, are offshore RLWT persons; All natural person beneficiaries (including discretionary beneficiaries) of the trust are offshore RLWT persons; A beneficiary (including a discretionary beneficiary) that is an offshore RLWT person has received a distribution from the trust within one of the last An offshore RLWT person is a more expansive concept than that of an offshore person for LINZ tax information purposes. 13

16 The RLWT rules do not apply to an offshore RLWT person who obtains an RLWT exemption certificate. four years before the relevant disposal of residential land and, if the beneficiary is a natural person, the total distributions to the beneficiary for the relevant year are more than $5,000; or The trust has disposed of residential land within four years before the relevant disposal of residential land and the trust has a beneficiary (including a discretionary beneficiary) that is an offshore RLWT person. Co-owners The legislation treats each coowner as disposing of separate residential land on the basis of an appropriate split of the underlying residential land and the consideration for its disposal. RLWT certificate of exemption The RLWT rules do not apply to an offshore RLWT person who obtains an RLWT exemption certificate under section 54E of the Tax Administration Act (TAA). A certificate must be issued if the person satisfies the criteria in either subsection (2), (3) or (4), as follows: Subsection (2): The person carries on a business of developing land or dividing land into lots or erecting buildings, and has provided a security to secure the performance of their tax obligations in relation to the residential land under section 7A of the TAA; Subsection (3): The person carries on a business of developing land or dividing land into lots or erecting buildings and has had tax obligations with which it has complied for the 2 years before applying, and IRD is satisfied the person will continue to comply; Subsection (4): The person is eligible for the main home exception from the bright-line test. (IRD considers it will be rare that an offshore RLWT person will meet this test, since the land must have been used predominantly, for most of the time the person owns the land, for a dwelling that was the main home of the person.) Who pays RLWT? Although the vendor is generally liable for the RLWT, the vendor s conveyancer is the paying agent for RLWT purposes. If (unusually) the vendor does not have a conveyancer, the purchaser s conveyancer is the paying agent. However, if the vendor and purchaser are associated persons, the associated purchaser must withhold the RLWT. Conveyancers who fail to meet RLWT obligations, or do not take reasonable care, are not liable for the core tax amount, but are able to be subjected to civil and criminal penalties under the Tax Administration Act IRD is also able to report non-compliance to the Law Society and Institute of Legal Executives. RLWT must be paid no later than the 20th of the month following the month in which a residential land purchase amount (see below) is paid (generally such a payment would occur on settlement). The conveyancer must file a prescribed return (IR1100) when 14

17 paying RLWT, including a nil return if it is calculated (applying the RLWT formula discussed in the next heading) that no RLWT is payable in relation to a residential land purchase amount. IRD has confirmed that the conveyancer does not need to file a return if the vendor produces an RLWT exemption certificate. How much RLWT must be paid? RLWT is only to be paid from a residential land purchase amount, which excludes deposits and part payments totalling in aggregate less than 50% of the purchase price. If there is a series of part payments the RLWT obligation only arises once the 50% threshold is reached (but RLWT, calculated on the full purchase price, would then need to be withheld from the remaining payments). RLWT that is payable (if any) is the lesser of: The highest marginal personal tax rate [currently 33%] (or the corporate tax rate [currently 28%] if the vendor is a company that is not acting as a trustee) x (current purchase price vendor s acquisition cost); Ten percent of current purchase price; or (In some circumstances) current purchase price less any amount required to discharge a loan secured by a qualifying mortgage less outstanding local authority rates (presumably this includes any targeted rates, such as for home improvement). The third option is applicable only if the mortgage is held by a New Zealand registered bank or New Zealand licensed non-bank deposit taker, and the vendor has its own conveyancer. IRD says this is to prevent the vendor artificially gearing up before disposal, to circumvent RLWT. If the purchaser s conveyancing agent is liable to pay RLWT, they are unable, in calculating the RLWT, to allow for amounts needed by the vendor to repay a loan secured against the property. In these circumstances it is theoretically possible that the vendor would not receive sufficient net funds to be able to secure discharge of the relevant mortgage, leading to a deadlocked situation preventing settlement. No reduction for any costs of improvements or costs of purchase or sale is permitted in calculating RLWT. Mortgagee sales A sale by a mortgagee of residential land is subject to the bright-line test, even though it is the mortgagee and not the property owner that is selling the land. What is not clear is how the RLWT rules apply, or are intended to apply, to a mortgagee sale of residential land owned by an offshore RLWT person. The conveyancer is acting for the mortgagee, not the owner, so one issue is whether the third option for calculating RLWT is available given that option requires the vendor to have a conveyancer. Although the mortgagee would generally be regarded RLWT is only paid from a residential land purchase amount, which excludes deposits and part payments totalling in aggregate less than 50% of the purchase price. 15

18 RLWT is an interim withholding tax, not a final tax. as the vendor, the mortgagee s status should be irrelevant in determining whether there is an offshore RLWT person. In kind transactions/land swaps As RLWT is only paid from a residential land purchase amount, in the case of land swaps IRD accepts that RLWT is payable only if there is also a monetary amount that forms part of the consideration. Part payments It is not uncommon for part payments of the purchase price to be made directly by a purchaser to the vendor, even though both parties have their own conveyancer, with only the settlement payment flowing from purchaser to vendor through the vendor s and purchaser s conveyancers. The vendor s conveyancer is only liable to withhold any RLWT payable from the settlement payment, and the vendor s conveyancer has no RLWT payment obligation to the extent that the RLWT payable exceeds the settlement payment. However, if the RLWT deducted is less than the RLWT payable, a written explanation must be provided to IRD. IRD can be expected to impose penalties if it considers a part payment situation has been structured to avoid RLWT. IRD does not consider the purchaser would be liable to withhold RLWT payable from any residential land purchase amount it pays direct to the vendor, where the vendor has a conveyancer. Tax credit and interim return RLWT is an interim withholding tax, not a final tax. A vendor will have a tax credit for the amount of RLWT paid. The vendor will be able to file an interim tax return before the end of the tax year, if it believes the RLWT exceeds the tax payable. IRD will be required to repay RLWT if and to the extent that: A tax credit for the RLWT is likely to be a surplus credit, having regard only to the residential land disposed of; The person has no outstanding tax obligations; and The person has provided IRD with information in a prescribed form (IR1102), that will require information as to (i) income and deductions relating to the land for the period of the part of the income year before the date that is 1 month after the relevant disposal. In most cases, any income tax liability under the bright-line test will arise when the vendor enters into an agreement for sale of the residential land, that being the usual date of disposal for the bright-line test. Where settlement (and payment of a residential land purchase amount) occurs only after the end of the income year in which the land is treated as being disposed of, the vendor will receive a credit for RLWT paid to IRD, which credit will be attributed to the income year of disposal. By this means, the vendor can utilise a credit arising in a later income year to reduce or eliminate tax payable in relation to the deemed earlier date of disposal. 16

19 Vendor information A vendor who enters into an agreement to sell residential land acquired within the bright-line period is required (by section 54C of the TAA) to give its conveyancer or, if it does not have one, the purchaser s conveyancer, information before payment of a residential land purchase amount. If the bright-line test applies the vendor is required to complete a residential land withholding tax declaration (IR1101) form, and the declaration will include: Name, address and tax file number; Whether or not it is an offshore RLWT person; and If it is an offshore RLWT person, whether it is associated with the purchaser. If the vendor is not an offshore RLWT person, this must be verified as follows: By the vendor personally if an individual; If the vendor is a company (including an LTC), by a director who is not an offshore RLWT person; If the vendor is a limited partnership, by a general partner who is not an offshore RLWT person; If the vendor is a trust, by a trustee who is not an offshore RLWT person. The residential land withholding tax declaration form also prescribes the documents to accompany the information to be provided by the vendor or the verifier. The form also prescribes the material required to support a statement that the person is not an offshore RLWT person or, if an offshore RLWT person, that the bright-line test does not apply. The verifier (of the statement that a non-individual vendor is not an offshore RLWT person) must also support its eligibility to verify the statement (ie that the verifier is not an offshore RLWT person and is a director etc). Information provided to the conveyancer/paying agent must be retained by the recipient for seven years. A vendor with an RLWT exemption certificate must provide its conveyancer with a completed Residential land withholding tax declaration, in which it confirms that it holds an exemption certificate. The form also requires it to show the conveyancer the original of the certificate. The declaration and a copy of the certificate of exemption should be retained by the conveyancer for seven years. The vendor is required to complete a Residential land withholding tax declaration (IR1101) form. 17

20 Information provided to the conveyancer/paying agent must be retained by the recipient for seven years. Issues for conveyancers in relation to vendor information If the conveyancer is provided with a form and verifying documents (complying with section 54C of the TAA) which confirm no RLWT is payable, then the conveyancer does not need to do anything further, other than to retain the statement and supporting information. In particular, the conveyancer does not need to file a return with IRD. Further, the conveyancer will not be subject to any penalty liability for a failure to withhold due to false or inaccurate information provided in the form or verifying documents provided it was reasonable for the conveyancer to rely on this information. The section 54C process is therefore a critically important one for conveyancers. In an ideal world, they would not be involved in completion of the section 54C form, but in practice it may well be the case that vendors seek assistance from their conveyancers in completing the form and in determining whether (for example, in the case of a trust) the trust vendor is an offshore RLWT person. Conveyancers need to tread carefully, because if they have an important role in the production of a statement, any reasonable reliance protection may be lost. If the vendor does not provide the relevant conveyancer with all the information necessary to calculate the RLWT, then the conveyancer should deduct an amount equal to 10% of the purchase price. A vendor s conveyancer should ensure their terms of engagement exclude liability in relation to any RLWT incorrectly withheld from an amount held on the client s behalf, so as to provide protection from a claim by the vendor for any RLWT withheld. IRD considers that, when RLWT is payable, the conveyancer should obtain the acquisition cost from Quotable Value to verify the vendor s information on cost and that it would only be reasonable to rely on a different acquisition price provided by the vendor if sufficient evidence is provided, such as the original acquisition contract. The legislation does not support IRD s view that the paying agent has to independently verify any of the information provided, as that appears inconsistent with the notion of reasonable reliance on that information. However, this is an area where caution should be exercised. Receiverships, liquidations and bankruptcy At the Select Committee stage, it was submitted that RLWT should not apply where the vendor is in liquidation or receivership. This submission was accepted in the Officials report to the Select Committee, with officials stating that RLWT should be treated the same as other withholding taxes on income (such as RWT and NRWT) in situations of liquidation or receivership. However, as enacted, the RLWT rules appear to apply to vendors that are in receivership or liquidation. 18

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22 Suggested checklist IRD is required to prescribe the information and documents that a vendor selling within the brightline period must provide to the vendor s conveyancer (or purchaser s conveyancer if, unusually, the vendor does not have a conveyancer). The following is a suggested checklist of information, documents and steps, intended to assist the vendor s conveyancer in the usual case where the vendor is not associated with the purchaser. Vendor information to be provided to conveyancer (on a prescribed form) prior to release of a residential land purchase amount: Name, address and tax file number. Whether or not an offshore RLWT person (noting that the IR1101 form is only completed if the bright-line test applies). If bright-line test applies: Whether vendor has an RLWT exemption certificate; Vendor s acquisition cost; Amount required to discharge any mortgage held by a New Zealand registered bank or New Zealand licensed non-bank deposit taker; and Amount of any outstanding local authority rates. Verifying information prior to release of a residential land purchase amount: Proof of address and tax file number. Production of any RLWT exemption certificate (if provided, no further information or steps are required). Vendor or verifier evidencing claim not to be an offshore RLWT person (eg natural person vendor or verifier shows conveyancer NZ passport). Landonline search by conveyancer to confirm date vendor became registered proprietor. Vendor provides original of acquisition agreement showing acquisition cost (recommended that conveyancer also obtains acquisition cost from Quotable Value). Letter from mortgagee showing amount to discharge mortgage (if applicable). Conveyancer checks with local authority whether any outstanding rates (including targeted rates). RLWT calculation prior to release of a residential land purchase amount: Conveyancer calculates RLWT (if any) to be withheld from residential land purchase amount. Conveyancer pays residential land purchase amount to vendor after first withholding RLWT (if any). Final conveyancer steps Conveyancer files a prescribed return with IRD (if RLWT calculation was required) and, if RLWT has been withheld, pays RLWT to IRD, by 20th of the month following payment of the residential land purchase amount. Conveyancer retains all information for seven years. 20

23 Contacts Barney Cumberland BA LLB(Hons) Partner, Auckland DD: M: E: barney.cumberland@simpsongrierson.com Paul Windeatt LLB(Hons) MA Senior Associate, Auckland DD: M: E: paul.windeatt@simpsongrierson.com 21

24 BARRISTERS AND SOLICITORS AUCKLAND: Level 27, Lumley Centre, 88 Shortland Street, Private Bag 92518, Auckland 1141, New Zealand. T WELLINGTON: Level 24, HSBC Tower, 195 Lambton Quay, PO Box 2402, Wellington 6140, New Zealand. T CHRISTCHURCH: Level 1, 151 Cambridge Terrace, West End, PO Box 874, Christchurch 8140, New Zealand. T