Residential land withholding tax update
19 July 2016
We have previously reported that a residential land withholding tax (“RLWT”) is to be introduced to supplement the new “bright-line” land taxing provision. The RLWT provisions have been enacted and apply to sales on or after 1 July 2016.
Broadly, the bright-line provision requires income tax to be paid on any gains from the sale of residential property acquired after 1 October 2015 and sold within two years, subject to certain exclusions (such as the vendor’s main home).
RLWT is required to be withheld where:
- The property being sold is residential land (as defined in the context of the bright-line provision) located in New Zealand;
- The vendor acquired the property on or after 1 October 2015 and has owned the property for less than two years before disposing of it;
- The sale amount is paid on or after 1 July 2016;
- The vendor is an offshore RLWT person (we note this is different to the definition of “offshore person” in the context of IRD number applications).
The definition of an offshore RLWT person is different for individuals, companies, partnerships and incorporated clubs and societies.
RLWT will not be required to be deducted when the vendor holds a certificate of exemption. A certificate of exemption can be obtained where the seller is an individual or trust and the property would be subject to the main home exclusion under the bright-line test. In addition, a certificate of exemption may be available where the seller carries on a business relating to land and has either provided acceptable security to Inland Revenue or has a good compliance history.
There is a prescribed form that needs to be completed as part of the sales process, “Residential land withholding tax declaration” (Form IR 1101), if the land was acquired on or after 1 October 2015.
The obligation to deduct RLWT primarily lies with the vendor’s conveyancer or solicitor. If the vendor does not have one, this obligation will pass to the purchaser’s conveyancer or solicitor. In the absence of either the obligation will fall on the purchaser. The RLWT must be paid by the 20th day of the following month.
In respect of the quantum of the withholding tax, the lowest of three calculations is applied:
- Sale price x 10%;
- Sale price minus purchase price the vendor originally paid for the property multiplied by the RLWT rate (being 28% for companies and incorporated societies and 33% for all other taxpayer’s) or zero;
- Sale price minus any amounts required to cover any mortgage or other security with a New Zealand registered bank or licensed non-bank deposit taker against the property, and minus any outstanding local authority rates. N.B. the security amounts can only be deducted if the person responsible for paying the withholding tax is the vendor or vendor’s solicitor.
A person who has sold land and had RLWT deducted can still file a New Zealand tax return and this would facilitate a refund of any excess tax withheld.