RSM New Zealand

New residential land tax from 1 July

You may be aware that Residential Land Withholding Tax (RLWT) will soon apply to sales of certain properties in New Zealand. Will the implications of this new regime be relevant to you or your business?

RLWT will generally apply when the sale amount is paid or payable on or after 1 July 2016 and:

  • The property is located in New Zealand and defined as "residential land"
  • The property is subject to tax under the bright-line test rules (i.e. the seller purchased or acquired the property on or after 1 October 2015 and owned the property for less than two years before selling), and
  • The seller is an “offshore RLWT person”.

What is RLWT?

A new withholding tax on residential property sales made by “offshore RLWT persons” within two years of purchase unless a certificate of exemption is held.

The RLWT acts as a collection mechanism for sales which are subject to tax under the bright-line test.

Who is an offshore RLWT person?

Individual

This includes all non-New Zealand citizens and non-permanent residents. It also includes a New Zealand citizen who has not been living in New Zealand for the last three years and a holder of a New Zealand residence class visa and has not been in New Zealand for the last twelve months.

Non-individual

New Zealand trusts and companies may also be considered “offshore persons” if there are significant offshore interests in them and the definition is specific to different entities.

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. Where a New Zealand company has two directors, one of whom is Australian, the company could be 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 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).

A number of New Zealand trusts will be affected by these rules. For example, a family trust with children studying overseas receiving distributions from the trust to assist with their living costs abroad could be subject to the RLWT rules.

Who must withhold and pay RLWT?

A withholder is the person required to deduct and pay an amount of RLWT on behalf of the seller.

The “withholder” will be the seller's conveyancer (unless the seller is associated to the purchaser). Otherwise it will be:

  • The purchaser's conveyancer (if the seller doesn't have a conveyancer), or
  • The purchaser if neither the seller nor the purchaser have a conveyancer, or the seller and purchaser are associated persons.

How much RWLT needs to be deducted?

Your accountant or tax advisor can assist with calculating the correct amount of RLWT.

Generally, RLWT is calculated as a lesser of

  • 33% of the vendor’s gain (or 28% if the vendor is a company), and
  • 10% of the vendor’s gross sale price

RLWT is an interim tax and the vendor may be eligible for a refund of tax upon filing the return of income for an income year when the property is sold.

Certificate of exemption from RLWT will be available in limited circumstances such as:

  • Where a residential property developer has a good compliance history or has provided a security interest to IR, or
  • Where the property is the vendor’s “main home”.

Would you like to discuss this topic further?

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Authors

Galina Bell
Tax Principal - Auckland
Grace Wee
Tax Specialist - Auckland