Companies and Trusts Beware - The Far-Reaching Arms of the New RLWT
The new Residential Land Withholding Tax (RLWT) came into effect in New Zealand on 1 July 2016. It has wider implications than expected. This new withholding tax was introduced by way of amendment to the Tax Administration Amendment Act 2016 and by enactment of the Taxation (Residential Land Withholding Tax) Act 2016.
The RLWT was introduced to enforce tax obligations of "offshore persons" in respect of income from capital gains made by offshore vendors following sale of residential land within 2 years of the date of ownership.
The definition of "offshore persons" for purpose of RLWT is wide and far reaching. It captures not only disposal of residential land by overseas residential land owners but also disposals by New Zealand trusts and New Zealand companies with overseas interests.
Trusts established in New Zealand may also be deemed offshore RLWT persons if they have one or more offshore discretionary beneficiaries. The definition of "offshore persons" in relation to trusts is of particular importance, as many New Zealand discretionary trusts may be caught by this definition and thus become, unwittingly, liable to RLWT should they transfer ownership of residential land for whatever reason within 2 years of owning it.
When does RLWT apply?
RLWT applies when:
- The property being sold is residential land located in New Zealand; and
- The vendor acquired property on or after 1 October 2015; and
- The vendor has owned the land for less than 2 years (i.e. within the "Bright-line Test" period) at the time of disposal of the land; and
- The vendor is an "offshore person" for purposes of RLWT.
Who is an offshore RLWT person?
A natural person is an offshore RLWT person if:
- He/she is not a New Zealand citizen and does not hold a residence visa; or
- He/she is a New Zealand citizen but has not been physically present in New Zealand in the past three years; or
- He/she holds a residence visa but has not been physically present in New Zealand in the past 12 months.
A New Zealand company is an offshore RLWT person if:
- More than 25% of the directors of the company are persons residing outside New Zealand; or
- More than 25% of the holders of decision-making rights in the company are held by offshore RLWT natural persons.
The definition applies to all companies including limited partnerships and look-through companies.
A trust is an offshore RLWT person if:
- More than 25% of the trustees or person who hold the power to appoint or remove trustees or the power to amend the trust deed are themselves offshore persons; or
- All of the natural person or non-natural person beneficiaries (companies or other entities) are offshore RLWT persons; or
- A non-natural person offshore beneficiary (including a discretionary beneficiary) has received a distribution from the trust within the previous four years; or
- A natural person offshore beneficiary (including a discretionary beneficiary) has received distribution(s) from the trust of more than $5,000 in any of the previous four years; or
- The trust has disposed of residential land within the previous four years and the trust has an offshore RLWT person beneficiary (natural or non-natural).
RLWT is available to an "offshore" vendor if the vendor holds a RLWT certificate of exemption prior to the completion of the sale of the residential land.
A vendor can apply to Inland Revenue for a certificate of exemption:
- He/she/it is in the business of developing land, dividing land or erecting buildings; and
- He/she/it meets the criteria of s 54E of the Tax Administration Act 1994; or
- The main home exemption is available to the "offshore" vendor.
A certificate of exemption may cover more than one interest in residential land. This is very relevant for developers and builders. Developers may apply for one certificate of exemption to cover all residential land(s) in the development.
It should be noted that for people who have tax obligations under any of the Inland Revenue Acts, they must be in compliant with all their tax obligations for a period of two years before they apply for the certificate. These obligations include, without limitation, obligations connected with child support, GST, PAYE and student loans.
Not many "offshore persons" would be eligible for a certificate of exemption as "offshore persons" would not normally have their main home in New Zealand. In order for an "offshore person" to qualify for the main home exemption on the sale of a property within 2 years of acquiring the property, the vendor should provide proof to Inland revenue that:
- The property was used 50% or a greater percentage of time as his/her main home; and
- He/she has resided in New Zealand from the time of purchase of the residential land and he/she has not since owning the property been out of New Zealand other than for brief periods and not more than 3 times.
How is RLWT calculated?
The RLWT payable is the lowest of the following three amounts:
- 33% of the offshore vendor's gain (28% if the vendor is a company).
- 10% of the sale price.
- The sale price less any local authority rates owing, and less security discharge amount (mortgages).
When does the obligation to pay RLWT arise?
The requirement to pay RLWT arises as soon as 50% of the sale price is paid. Usually this will be at settlement but there are often situations where the threshold may be reached prior to settlement (e.g. where there are a number of part payments). This is very relevant for developers and builders.
Who has the obligation to account for RLWT?
The obligation to pay RLWT to Inland Revenue lies primarily with the vendor's solicitor or conveyancer. If the vendor does not have a solicitor or conveyancer the obligation to pay RLWT is on the purchaser's solicitor or conveyancer. If neither vendor or purchaser has a solicitor or conveyancer the obligation to pay RLWT rests with the purchaser.
Please note that the above information is provided by Christi Law for general information only. The contents contained in this article do not constitute legal advice and should not be relied on as such. To review our other articles please visit our website, www.christilaw.co.nz.