The first of the government’s planned tax measures aimed at cooling the Auckland property market is due to come into effect next month.
The new rules, announced earlier this year, include a range of property tax compliance moves to ensure New Zealand property buyers and overseas investors alike “pay their fair share of tax”.
The changes include:
Introducing transparency measures particularly aimed at non-resident investors
Establishing a “bright-line” test to tax any capital gains made from the sale of an investment property owned for less than two years
Introducing a withholding tax for non-residents selling residential property
Committing to an extra $29 million of funding for Inland Revenue to increase its property tax compliance activities
The new land information measures on property transactions are likely to apply to all residential property transactions from 1 October 2015. They aim to obtain tax information from people buying and selling land, and improve the enforcement of non-residents’ tax obligations.
Those planning to buy or sell property in New Zealand must work through their disclosure obligations carefully and may be required to make a tax statement to Inland Revenue, providing their IRD number. This means checking whether they are an “offshore person”, based on immigration and citizenship rules, rather than solely relying on their New Zealand tax residence status.
Individuals buying or selling their main home, other than people deemed to be “offshore persons”, should be exempt from the requirement unless selling a third home within a two-year period. “Offshore persons” would be required to open a New Zealand bank account to obtain an IRD number.
The new “bright-line” test, expected to apply to sales of properties purchased on or after 1 October 2015, will require income tax to be paid on gains from residential property purchased and sold within two years. This supports the existing tax rules, such as the current intention test which taxes gains from the sale of land purchased with a purpose of resale.
Of course, not all property transactions lead to gains. Losses from sales taxed under the new bright-line test will be “ring-fenced” – i.e., offset only against future gains on other land sales.
The government does not want to capture too many properties purchased without a purpose of resale. So there are a number of exceptions where the two-year rule does not apply, including a person’s main home, inherited property, and transfers of property in a relationship settlement.
The government is looking to introduce resident land withholding tax on residential property sales from 1 July 2016 by “offshore persons”. Revenue Minister Todd McClay is calling for feedback on this measure by 2 October 2015.
At this stage, the Issues Paper on the subject indicates that “offshore persons”, a defined group of people and companies, would be required to pay resident land withholding tax if the property sold is “residential land”, was acquired on or after 1 October 2015, and was owned for less than two years. The resident land withholding tax would apply as an interim tax, which is to be calculated at the lower of 33% of any gain or 10% of gross proceeds.
Sanjay Kumar is a Tax Executive Director and Vidya Garimella is a Tax Consultant at EY