As many readers now know, a new wave of tax compliance has been imposed on taxpayers who purchase residential properties. Unfortunately, for the unsuspecting few, this could lead to a visit from the Tax Department. So as the dust settles on the new property tax rules what do taxpayers need to be aware of and what is the likely future impact of the changes?
First let’s quickly recap the new property tax rules…
A summary of new property tax rules
The new rules can be broken down as follows:
- Each party to a residential property transaction will need to provide information to their lawyer in a signed tax statement under section 156B of the Land Transfer Act 1952. Failing to do so will likely result in penalties, with the first offence being a fine of $25,000. Land Information New Zealand will share this information with the Inland Revenue Department. The information collected includes:
- Tax numbers or confirmation that the transaction is non-notifiable;
- For those people who are selling or buying with a ‘passive’ asset holding Family Trust, these changes mean that the Trust will require a tax number;
- Whether or not the property has a home on it;
- Whether the parties to the transaction are related;
- Whether parties to the transaction are New Zealand tax residents. If either party is a tax resident in a country, other than New Zealand, then they will need to name the country and provide the tax number equivalent; and
- Whether the property being sold has been the taxpayer’s ‘main home’.
- A new “bright-line” test is now applied to residential property sales. This test is a supplement to current tax rules. Under this new test, any gains from a residential property sold within two years of purchase will be taxable, unless the property is:
- The seller’s main home;
- Inherited from a deceased estate; or
- Transferred as part of a relationship property settlement.
What should parties to a residential property transaction be aware of?
There appears to be a lot of confusion around these rules, which is largely due to the simple fact that they were rushed into law. So we should expect further clarifications and/or amendments. That said, here are some of our initial thoughts:
- Both the transferor and transferee will have to provide a set of statements to their respective lawyers. This means making positive statements in relation to tax law. So it is important to have the response reviewed by your tax advisor to ensure the lawyer receives the appropriate information;
- The transferor and transferee should seek written confirmation from their lawyer that section 156 of the Land Transfer Act 1952 has been complied with – this will protect them from penalties;
- For those residential property buyers with a passive Family Trust, the Family Trust will now require a tax number. A further complication arises if a corporate trustee with no tax number is also involved. In order for a Trust to have a tax number all Trustees need to provide their tax numbers – so residential property buyers may need to factor in obtaining two tax numbers.
- According to the rules individuals purchasing a house must:
- Be a New Zealand citizen; and
- Have been in New Zealand within the last three years to be entitled to the “main home” exemption.
This calls into question the application of the main home exemption for returning New Zealanders;
- Those buying and selling their home and claiming the main home exemption at least twice within the 2 years immediately preceding, will be required to provide their tax number as part of the tax statement;
- For those that provide a tax number as part of a property transaction, it is possible that they will receive an automatically generated letter from the Tax Department, requesting an explanation as to why the transaction is not taxable under the new rules. While the Tax Department have signalled that this ‘does not necessarily mean that tax must be paid on the sale of the property’, the letter must be replied to and an explanation given;
- Anyone who has previously received advice on property transactions that are yet to eventuate, should consider revisiting the advice and check whether the new rules change the advice provided;
- The Tax Department have noted that the information collected on property purchases could be shared with overseas tax authorities (in accordance with information sharing agreements). This means that overseas tax departments will know more about the activity of their tax-residents;
- Finally, for those that live over multiple homes, there are various tests that will be applied to determine whether each home qualifies for the main home exemption. Given the mobile nature of many taxpayers, it would appear that these tests will catch more people out than first thought.
Where to next?
As previously mentioned these, new tax rules were rushed into law, so the practical application of the rules is likely to cause some initial confusion and frustration. That said, the rules are here to stay and we have no choice but to work through them.
Experience to date suggests that anyone purchasing or selling residential properties should request written confirmation from either their tax advisor or lawyer that the new rules have been correctly applied. This will protect them from any penalties. If you are advised to provide a tax number, you may need to have a further conversation with your tax advisor, and will likely receive communication from the Tax Department to this effect.
Lurking on the horizon is a further change for non-residents that could see them hit with a withholding tax on the sale proceeds of a residential property. This would result in a tax return filing obligation if the non-resident considered the withholding tax to be refundable.