(Clauses 44 and 45)
Summary of proposed amendment
There are two main calculation methods for RLWT, with the amount of RLWT payable being the lesser of the amounts calculated under these methods. A third method is available, where the paying agent is the vendor’s conveyancer and the amount of RLWT would exceed the amount available from the total purchase price once a mortgage obligation with a New Zealand-registered bank or non-bank deposit taker has been discharged.
New section RL 4 provides that the amount of RLWT to be paid will be the lesser of:
- 33% (or 28% if the vendor is a company that is not acting as a trustee) x (current purchase price – vendor’s acquisition cost) (set out in proposed section RL 4(2)); and
- 10% x current purchase price (set out in proposed section RL 4(4)).
New section RL 4(3)(b) defines “current purchase price” as the price agreed by the vendor and purchaser for the disposal of the residential land that the residential land purchase amount relates to. This figure includes deposits and part-payments. New section RL 4(3)(c) defines the “vendor’s acquisition cost” as being the purchase price paid by the vendor for their acquisition of the residential land being disposed of.
It is expected that the vendor’s acquisition cost will generally be available from Quotable Value.
Virginia agrees to sell her residential property in Tauranga to Thomas. Thomas pays a $100,000 deposit and another $400,000 upon settlement. In determining Virginia’s RLWT liability, the “current purchase price” is $500,000. Virginia originally acquired the residential property for $350,000. The “vendor’s acquisition cost” for the purposes of determining Virginia’s RLWT liability is $350,000.
RLWT calculated using the formula in section RL 4(2) is 33% x ($500,000 – $350,000), or $49,500. RLWT calculated using the formula in section RL 4(4) is 10% x $500,000, or $50,000. Therefore the amount of RLWT payable is $49,500.
When RLWT exceeds the funds available following discharge of mortgage obligations
To maintain the integrity of the RLWT and the broader tax system, RLWT will generally be paid before other disbursements.
A vendor may have a mortgage secured over the residential land being disposed of. The mortgagee may require the vendor’s mortgage obligation to be discharged before the title to the residential land can be released.
In most cases this should not be a problem, due to the vendor’s gain approach used in new section RL 4(2), but in some situations, the amount of RLWT payable calculated using the two methods outlined above may result in insufficient funds to discharge the vendor’s mortgage.
A third calculation method will be available when the vendor’s conveyancer is the paying agent and the amount of RLWT payable will be the lesser of the amounts calculated using the methods set out in proposed sections RL 4(2), RL 4(4), and RL 4(6).
The amount of RLWT payable using the method in new section RL 4(6) is the current purchase price less the “security discharge amount”. The security discharge amount is defined in section RL 4(7) and (8) and will be the total amount required by a New Zealand-registered bank or non-bank deposit taker (as licensed under the Non-bank Deposit Takers Act 2013) to discharge their mortgages or other securities over the residential land.
Officials will monitor the situation to ensure that this provision is not used to undermine the integrity of the RLWT and the broader tax system.
It is expected that the vendor’s conveyancer will be the paying agent in the majority of transactions. However, when the paying or withholding agent is the purchaser’s conveyancer or the purchaser themselves, this third calculation method will not be available. This is consistent with other withholding tax rules.
Consider the previous example of Virginia and Thomas. Recall that the RLWT payable using the methods set out in section RL 4(2) and (4) will be $49,500. Virginia has a mortgage with a New Zealand bank for $460,000. The New Zealand bank requires the full $460,000 to be discharged upon settlement. This would not be possible, because after RLWT has been retained by the paying or withholding agent, only $450,500 will remain from the current purchase price.
Virginia’s conveyancer is the paying agent for the purposes of RLWT. This, combined with the fact that Virginia’s mortgage is with a New Zealand bank means that the third method in proposed section RL 4(6) will be available. The amount of RLWT payable will be $40,000 ($500,000 – $460,000).