New Property Tax Laws for Residential Property Sales
Important statutory amendments connected with the sale and purchase of residential land and buildings in New Zealand took effect on 1 October 2015. These new disclosure and tax obligations will apply to any transaction involving the sale and purchase of residential property where the agreement is entered into from 1 October 2015.
The key changes introduced can be summarised as follows:
- A new Bright-Line Test, which sets out an 'objective test' rule for determining when gains from a residential property transaction will be taxable.
- Mandatory tax information (IRD number) to be provided by property purchasers and sellers to their lawyers in a signed Tax Statement for the information to be eventually passed on to Inland Revenue.
- Offshore persons also subject to the new residential property tax.
- Proposed Resident Land Withholding Tax for offshore persons for ease of tax collection.
The newly introduced Bright-Line Test requires tax to be paid on any gains from the disposal of residential property that is acquired and disposed of within 2 years of the acquisition of the property. The gain is to be treated as part of income for income tax purposes.
The 2 year period starts from the date the transfer of property to the eventual purchaser is registered with Land Information New Zealand (LINZ) and ends on the date the purchaser disposes the property. The disposal date is the date the agreement to sell the residential property is signed.
Exceptions to the Bright-Line Test
Disposal of property for certain exempted transaction are not subject to the Bright-Line Test. These exceptions include:
- Disposal of property that is the main home of the seller / transferor.
- Disposal or transfer pursuant to a relationship property settlement.
- Transfer to beneficiaries on the distribution of a deceased estate.
- Forced sales of residential properties such as mortgagee sale and sale pursuant to court orders.
(i) Main Home Exception
The new rule does not apply to a person who disposes of residential property if the property is used predominantly by the person who owns the property for a dwelling that was the main home of that person.
Other points to note:
- It must be the main home of the owner himself or herself.
- A person is not entitled to use the main home exemption if he or she has already used it on 2 occasions in the preceding 2 year period.
- Main home exemption does not apply to NZ citizens who have been away continuously for 3 years or longer or those holding NZ permanent resident visas if they have been away from New Zealand for a continuous period of 12 months or more.
- The main home exemption is not available to offshore persons or family trusts set up by offshore persons.
Main Home Exemption for homes owned by trusts
The main-home exemption may apply to certain homes owned by family trusts. If the property is owned by a trust, the main home exemption may apply in circumstances where the dwelling is the main home of a beneficiary of the trust and the settlor of the trust does not own another main home.
(ii) Relationship Property Exemption
A property transfer between spouses or de facto partners pursuant to a relationship property settlement is exempted from the new property tax. However a subsequent sale within 2 years will be subject to the Bright-line Test.
(iii) Inheritance Exception
The transfer of a residential property to a beneficiary by an executor or administrator of a deceased estate is exempted from the Bright Line Test. However the sale of the property by the beneficiary may be captured by the Bright Line Test.
Mandatory Tax Information to be provided by property buyers and sellers by way of a signed Tax Statement
To enable Inland Revenue to follow up on tax obligations connected with residential property transactions sellers and purchasers of property will from 1 October 2015 be required to complete a signed Tax Statement prior to completing a residential property transaction.
The information in the Tax Statement must be provided to LINZ prior to the registration of the transfer of the title in the property. LINZ will, in turn, pass the information to Inland Revenue.
The new requirements for purchasers and sellers are:
For persons living in New Zealand
- Property purchasers and sellers to provide their IRD numbers and other details to LINZ before title in the property can be transferred from the seller to the purchaser (unless the exceptions apply).
- All trusts that do not currently have an IRD number must obtain one if they intend to purchase, or to sell any residential property other than the main home even if the trust does not earn taxable income.
For offshore persons
- Offshore persons who intend to purchase or sell residential properties in New Zealand must have New Zealand IRD numbers.
- IRD numbers will only be issued to an offshore person who has an operational New Zealand bank account.
- Purchasers and sellers of residential properties who are tax residents in another jurisdiction are required to provide their tax identifier number in their country (or the equivalent of a New Zealand IRD number in their country) to LINZ through their lawyers.
Definition of "Offshore persons"
"Offshore persons" include:
(a) A New Zealand citizen who is outside New Zealand and has not been in New Zealand within the last 3 years;
(b) A person who holds a New Zealand residence visa, who is outside New Zealand and has not been in New Zealand within the last 12 months; and
(c) A person who is not a New Zealand citizen and who does not hold a residence visa.
Additional disclosure requirements
In addition to their IRD numbers, sellers / transferors and purchasers / transferees of residential properties must in the Tax Statements also disclose if any member of their immediate family is a New Zealand citizen or hold New Zealand resident, work or student visas. If a purchaser answers the question in the affirmative the purchaser will also be required to disclose if his or her member of family intends to live in the property purchased.
If nominee transferee it is tax information of nominator that must be disclosed
Under the new regime whether a transferor / transferee is acting as a nominee in the transaction is determined at the time of transfer of the land. The definition of "nominee" is the definition in the Income Tax Act. Under that Act a nominee holds or does something as a nominee for another person if the person acts on the other person’s behalf.
If the transferor or transferee was merely acting as a nominee for a nominator, it is the nominator's tax information that must be disclosed in the Tax Statement. It will also be the nominator who has to bear the tax liability.
By way of example a person would be acting as a nominee if he or she is a trustee pursuant to a bare trust, where the trustee is obliged to act in accordance with the directions of the beneficiary. An attorney under a Power of Attorney is also acting as a nominee for the donor.
Off shore Persons and Resident Land Withholding Tax
Offshore persons are subject to the residential property tax.
To facilitate the collection of tax from offshore persons it has also been proposed that resident land withholding tax be applied to transactions involving sale of residential properties by offshore owners, who sell their property within 2 years of their purchase.
It is expected that Residents Land Withholding Tax will apply from 1 July 2016. Based on Official Issues Papers prepared by Inland Revenue and Treasury to date the withholding tax is expected to be the lower of:
1) 10% of sales price; and
2) 33% of the offshore seller's gain.
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.