Property / Real Estate

Residential Land Withholding Tax - What it all means

There has been a lot of confusion in the market regarding the recent law changes affecting residential land transactions.

There is a level of uncertainly in our foreign communities as to whether or not a non New Zealand tax resident can buy property in New Zealand, and what limitations apply to purchasing residential property.  Added to this are the recent limitations trading banks have put in place.

As to the increased contributions required by investor purchasers in relation to trading bank findings, of themselves those increased thresholds don't prevent acquisitions, only the  manner in which they are funded.

In relation to tax, although there have been new rules put in place, the practical effect of these changes should be minimal.  Where a residential property is purchased for the purpose of re-sale, "profit" has long been taxable.

The practical difference is that until now, there has been no simple process in place by which such transactions could be monitored and tax payment obligations accessed, independent of the disclosures of taxpayers, or investigation by IRD.

With each of:

  • compulsory disclosure of tax information of vendors and purchasers to LINZ; and
  • the "Bright Line" test deeming the profit on the sale of a residential property taxable where it was purchased with the intent of re-sale and sold within two years of purchase;

on all land transactions from 1 October 2015;

and now,

  • the introduction of the new Non-Residential Land Withholding Tax ("RLWT") regime, whereby RLWT is now to be deducted from the sale proceeds of residential properties where those properties are sold in New Zealand by non New Zealand tax residents within 2 years of acquisition effective from 1 July 2016;

the ability for IRD to be more proactive and assertive in tax assessment and collection has never been greater, but as we have stated above, the actual effect shouldn't be very different given that similar rules that have been in place for a significant period of time to tax profits properties bought to the purposes of re-sale.   The only change will arise where parties should have been disclosing and paying tax on such sales but haven't. Now, they will be caught by the more stringent processes recently adopted.

Only time will tell whether the practical reaction to these recent changes matches the legal position that already exists.

 

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

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