Selling a Property? Taxation is Coming!

Are you going to have to pay up to 33% resident land withholding tax on your next property sale?

There are now laws in place to ensure that offshore persons who have purchased residential land on or after 1 October 2015 and sell it within two years pay resident land withholding tax of up to 33%. Residential land is all land deemed residential in nature whether or not there is a house on it. For example rural zoned farm land that has the potential to have a dwelling built on it will be caught.

You may assume this won’t apply to you because you live in NZ, however the definition of offshore person is so wide that it may well catch your next property sale.

Any person living overseas who is not a NZ citizen is obviously an offshore person but the new rules extend the definition to each of the following:

• a NZ citizen who has been outside of NZ continuously for 3 or more years
• a person who has NZ residence status and has been overseas continuously for the last 12 or more months
• a trust or company where 25% or more of the trustees, directors or shareholders are offshore persons
• a trust where all the beneficiaries are offshore persons
• a trust which has distributed more than $5,000 in 1 of the 4 years immediately prior to the sale to any individual beneficiary who is an offshore person
• a trust which has distributed any amount in any of the 4 years immediately prior to the sale to any non- individual beneficiary who is an offshore person
• a trust which has sold residential land within the 4 years immediately prior to the current sale which has an offshore person as a beneficiary

Take for example the situation where mum and dad have set up a family trust which owns a property. The beneficiaries of that trust include their children, one of whom now lives and works overseas and has not been home for the last 3 years. If mum and dad decide to distribute any funds to that child they may get caught by the definition and find themselves unable to sell their property without triggering an obligation to pay tax.

Another example is where a rental property has been bought in the name of a company and one of the directors or shareholders relocates overseas permanently. In the case of a closely held company where there are 2 or 3 directors or shareholders this will result in the company being considered an offshore person. In the event that the property is sold within the 2 year period the obligation to pay resident withholding tax will be triggered.

Developers and builders need to pay close attention to these new rules if they want to avoid potentially heavy tax bills. Under the new rules they can apply for an exemption if they have a good compliance history with Inland Revenue or they provide a security interest to Inland Revenue. Offshore persons selling their main home can also apply for an exemption but if they fail to do so tax will be payable.

If tax is to be paid then the new rules require the sellers solicitor to deduct the full amount of the tax and pay that to the Inland Revenue before distributing any sale proceeds to the seller. Tax will be calculated based on the lower of the following :

• 33% (or 28% if the seller is a company) x (current purchase price – the sellers acquisition cost)
• 10% x the current purchase price;
• Current purchase price – security discharge amount – outstanding rates.

In the event that there is a shortfall of sale proceeds to pay the tax then the seller is obliged to top up the amount.

The rules also give no allowance or consideration for deductible expenditure on the property; however sellers will be able to file an interim tax return to claim these after the tax has been paid, or they can wait until the end of the financial year to make a claim as part of their normal tax return.

If you are a developer or are selling residential property, and think that the tax might apply? Get in touch with us today to discuss. This is particularly important if the property is owned by a trust or a company.