As you will be aware by now John Key announced a number of proposals to improve tax compliance in New Zealand’s Property Investment sector the first parts of which will be included in Thursday’s Budget.
Currently, under New Zealand’s existing tax laws, anyone who buys a property with the intention of selling it for a gain is liable for tax on any gain. This applies equally to New Zealanders and to overseas buyers. These existing laws, while clear about taxing gains, have to rely firstly on establishing the intent of the buyer or an assessment of their intentions by the Inland Revenue at the time of purchase and then being aware that the property has been sold and then having sufficient information on the investor. This is especially true for overseas investors where currently the Inland Revenue may not have the information to track them down and enforce compliance. They then may have to chase foreign vendors to recover the tax.
To ensure fairness the Government is proposing, in addition to the existing laws, new measures (tightening the tax rules and allocating extra funding to the IRD to track and identify transactions that are likely taxable and enforce compliance) to make sure that property investors pay their fair share of tax – whether they are from New Zealand or overseas.
Subject to consultation the new measures, which would come into force from 1st October 2015 for any property brought and sold, are:
- A New Zealand IRD number will need to be provided by both New Zealanders and Non-Residents who are buying or selling property as part of the land transfer process. The exception will be the main family home.
- Non-resident buyers and sellers, if resident for tax purposes in another jurisdiction, must also provide their tax identification number that has been issued to them by that country as well as identification (For example a current passport).
- To ensure that the Anti-Money Laundering Rules apply to Non-resident buyers, they will be required to set up a New Zealand Bank Account, prior to applying for an IRD Number in order to buy a property.
- A new “Bright Line” Test will be introduced for both New Zealanders and Non-Residents buying residential property to supplement the current Inland Revenue’s ‘intentions’ test. Under this new test, which will apply to any property brought on or after 1st October 2015, any gains from residential property sold within two years of purchase will be taxed. The exemptions are:
- If the property is the seller’s main home, or
- Inherited from a deceased estate or
- Transferred as part of a relationship property settlement.
- Under the Bright Line Test if the property is sold within the two year window any gains will be taxed at the seller’s normal income tax rate. The Seller will include the gain in their income tax return for the year.
In addition to the new measures the government is proposing to research the possibility of introducing a withholding tax for non-residents selling residential property. By ensuring all buyers and sellers are required to provide an IRD number for property transaction will make the tracking of non-residents for the Inland Revenue simpler. This additional measure is being mooted to be introduced as early as mid-2016 to ensure overseas property buyers meet their obligations under both the existing law and the new measures.
Timeline for the new Bright Line Test:
- The government will be consulting with parties over the new proposals;
- Issues paper released July 2015;
- Legislation introduced August 2015
- New Bright Line Test will apply to all properties brought on or after 1st October 2015.
So while there may be an arbitrary 2 year bright line test, the aim of the changes is to make it easier for the IRD to track who is buying and selling property and to recover tax from them. We would expect that there will be a very high chance that a withholding tax will be introduced.
Finally, recent Herald and other newspaper articles covering foreign buyers arriving at their lawyers’ offices with suitcases of cash to pay for properties may be true, but the current Anti Money laundering Rules are more than sufficient to cover these situations. The lawyers are under an obligation to determine the source of the funds and if in any doubt to notify the police immediately or they themselves will face prosecution.
As always, we are available to assist you. Call us to discuss.