Taxation of Residential Property

As from 1 October 2015 a number of new filing requirements and tax laws apply to the sale of residential land.

(NB – the legislation adopting these changes is yet to be passed but the government have said they will be backdate to 1 October 2015 so you should work on that date at present.)

A    Filing Requirements

  1. NB – These apply to all Property Sale Agreements (not just residential agreements) entered into from 1 October 2015 and to any agreement entered into before 1 October 2015 if the change of title is not registered until after 1 April 2016.
  2. The new rules require every Vendor and Purchaser to complete a Land Transfer Tax Statement (LTTS).

The LTTS requires the following details:

  • Certificate of title
  • Full name of parties involved in the transfer
  • Whether or not you are a NZ citizen
  • Whether the transfer is Non Notifiable (see 4 below)

If the transfer is Non Notifiable then you don’t have to provide your IRD number or complete the rest of the LTTS.

If you can’t claim the Non Notifiable exemption (eg. Your house is owned by a trust) then you have to provide your IRD number and if you are an “offshore” person details of where you live and your tax ID number for that country.

3.  An offshore person is:

In the case of an Individual:

  • NZ Citizen – not entered NZ within last 3 year
  • NZ Resident – not entered NZ in 12 months
  • Not a resident or citizen

In the case of a Non-Individual

  • Incorporated overseas
  • 25% or more control / ownership overseas
  • An offshore person is required to have NZ bank account as pre-requisite to getting an IRD number
  • A NZ resident who becomes an Offshore Person (e.g. shifts overseas) will have to provide IRD with details of their NZ bank account.

4.  A Non Notifiable transfer is one which is:

  • Your main home – you will need to declare that the house is or will be your main house, but this only applies if the home is owned by an individual.  If your house is owned by a trust or company you have to complete the LTTS in full.
  • A mortgagee sale
  • Transfer from an Estate
  • Public or Maori land

Knowingly providing misleading or false information carries a fine of up to $50,000.

5.  To be your main house the house must be:

  • Used predominantly as a dwelling – based on area.  e.g. If you own a house with an attached flat and the flat area is bigger than the house the main home exclusion won’t apply.
  • If you sell 3 or more main houses within 2 years you have to provide full disclosure.
  • A trust must provide full disclosure as must an offshore person.

6.  NB  – The fact you have to make full disclosure doesn’t necessarily mean any profit is taxable.

7.  Potential Problem

If either the Vendor or Purchaser don’t have an IRD number and are required to make a disclosure, settlement may have to be delayed which could trigger penalty clauses in the sale agreement.

Therefore, all Trusts will now require an IRD number.

B    The 2 Year Test

  1. This is referred to as a “Bright Line” test.
  2. It applies to:
  • Properties purchased after 1 October 2015
  • Sale of residential land
  • Anywhere in the world
  • Within 2 years of acquisition

Residential land is:

  • Land with a dwelling
  • Land with an arrangement to build a dwelling
  • Bare land – area and nature is capable of having a dwelling put on it
  • Dwelling includes serviced apartment but not rest home / retirement village or B & B

That is not used predominantly as:

  • The main home of an individual or beneficiary of a trust
  • Business premises
  • Farmland

3.  To be Farmland the land must be:

  • Capable of being worked as an economic unit
  • Of area and nature that indicates it is a farm
  • Capable of producing revenue sufficient to cover holding/operating costs, includes cost of capital and recompense for owner’s labour

Based on the above virtually no farm in NZ will meet the farmland exemption???

Almost certainly, all sales of lifestyle blocks within 2 years of purchase are likely to fall with the definition of residential land and therefore be taxable.

4.  Exemptions

The rules don’t apply to residential land that was:

a)    transferred under a RPA (Relationship Property Agreement)

b)    inherited land

5.  When Does the 2 Year Period Start and End?

The 2 Year Period Starts when title is registered in the Purchaser’s name.

It Ends when a Sale & Purchase Agreement is signed.

Using different methods to determine the Start and End dates is frankly, ridiculous and could substantially extend what any reasonable person would see as being 2 years.

e.g.  You sign an agreement to buy a residential section which is part of a new subdivision in October 2015.

You obtain title in March 2017 and sell the section in January 2019.

Although it has been nearly 3½ years since you decided to buy the section under the Residential Property rules you have only owned the land for 22 months so any profit will be taxable.

6.  What happens if you live in a house for period and then rent it out and then sell it within 2 years?

e.g.   you buy house and live in it for 6 months but are then transferred out of town so rent it for 12 months while you try and sell it.  The predominant use (in terms of days) is rental so any profit is taxable.

7.  Can a Home owned by a Trust qualify for the Main Home exemption?

Yes, provided the principal settlor of the Trust does not have another main home or is the beneficiary of another trust which has a main home.

e.g.  if parents own their home and they give an interest free loan to their son’s trust to enable that trust to buy a home for the sons use, the home purchased by the trust won’t qualify for the main home exemption if the parents’ loan exceeds funds introduced by the son.

In the above example the problem will be overcome if the son buys the house in his own name.

8.  How is the Profit Worked Out?

Profit is                                     Sale Price

Less                                         Sale Costs

Less                                         Purchase Price

Less                                         Any Capital Improvements

NB – Holding Costs, i.e. interest, insurance, rates and repairs are not deductible in working out profit.

Any loss can only be offset against other land profits.

9.  Other

If 50% or more of the assets of a company, or trust are residential property, any change in control of the company or trust may trigger a deemed sale.

C    Residential Land Withholding Tax

This is scheduled to apply from 1 July 2016.

It will only apply to sales by an offshore Vendor of residential land owned for less than 2 years.

As the proposal stands at present it is the Purchaser who will have to pay the withholding tax, so any NZ resident buying from an Offshore Vendor will be caught up in the withholding tax rules.  Seems remarkably stupid but this is how this tax works overseas.

 

Disclaimer - These notes are summarised and each person must seek specialists advice. This checklist is the property of WK Advisors and Accountants Limited and is not be copied without express permission.