Residential Land Witholding Tax
This article was written by Tom Appleton.
The Residential Land Withholding Tax (‘RLWT’) has come into effect from 1 July 2016, it introduces a tax on profits made by offshore persons who buy and sell residential land in New Zealand within two years of the date the land was purchased. The tax applies to any land deemed residential in nature whether or not there is a dwelling on the section. It is the Vendor’s solicitor’s responsibility to collect and pay the tax to the IRD by way of a deduction from the sale proceeds and in this way gives more teeth to the recently introduced Bright Line Test.
The tax applies to disposals of residential land in New Zealand where:
- The land was acquired by the Vendor on or after 1 October 2015;
- The Vendor is disposing of that land within 2 years of the date of acquisition;
- The Vendor is an “offshore RLWT person”;
- The Vendor does not have a Certificate of Exemption from RLWT.
The test for an offshore person is relatively well defined in the case of an individual. If a New Zealand citizen has been outside of New Zealand continuously for three or more years then they fall into this category and if a New Zealand resident has been outside of New Zealand continuously for one year or more then they are caught. If a trust or company is involved they will be considered an offshore RLWT person if 25% or more of the trustees, beneficiaries, directors or shareholders are offshore persons. A trust can also be considered an offshore entity if certain distributions have been made to offshore beneficiaries.
A Certificate of Exemption can be applied for in the following circumstances:
- If the offshore Vendor is disposing of their main home;
- The offshore Vendor is a developer, sub-divider or builder with a good compliance history or can provide a bank bond.
If a Vendor is captured under the RLWT rules and they don’t qualify for a Certificate of Exemption, the tax will be calculated based on the lower of the following three methods:
- 33% (or 28% if the Vendor is a company or trust) x (current purchase price – the Vendors acquisition cost);
- 10% x the current purchase price;
- Current purchase price – security discharge amount – outstanding rates.
The legislation gives no allowance or consideration for legitimately deductible or claimable expenditure on the property, however Vendors will be able to file an interim tax return to claim these after the RLWT has been submitted to the IRD, 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 selling residential property and think that the RLWT might apply please seek advice from your solicitor, especially if a trust or company is involved.