When RLWT applies

(Clauses 44 and 45)

Summary of proposed amendment

For RLWT to apply to a particular disposal, three conditions must be met. The first is that it must be a disposal of residential land located in New Zealand. The second is that the disposal is or would be treated as income of the vendor under the bright-line test, ignoring the “main home” exception. The third condition is that the vendor must be an offshore person.

Key features

Residential land in New Zealand

New section RL 1(2) provides that RLWT will only apply to residential land located in New Zealand. This restriction is necessary otherwise RLWT could apply to disposals of property situated overseas where the transaction has no link to New Zealand.

The meaning of “residential land” follows the definition used for the bright-line test, and is:

• land that has a dwelling on it;
• land for which the owner has an arrangement that relates to erecting a dwelling;
• bare land that may be used for erecting a dwelling under the rules in the relevant operative district plan;
• but does not include land that is farmland or used predominantly as business premises.

Further information on the meaning of “residential land” will be provided in Inland Revenue’s Tax Information Bulletin on the bright-line test legislation.

Bright-line income

The second requirement is that the residential land purchase amount must be or would be treated as income for the vendor under the bright-line test, ignoring the “main home” exception. This is provided for in new section RL 1(2)(a). Proposed section RL 1(2)(a) refers specifically to new sections CB 6A and CB 16A, which provide for the bright-line test and the main home exception. This is because the RLWT is designed to be a collection mechanism for the bright-line test.

Note that this reference to “income” under the bright-line test means that there will not need to be a land title transfer for an RLWT obligation to arise; there will only need to be a residential land purchase amount. This means that off-the-plan sales, for example, will be subject to RLWT if other conditions are also met.

A disposal of New Zealand residential land will therefore be subject to RLWT if the vendor acquires the residential land on or after 1 October 2015 and disposes of it within two years of acquisition.

Further information on how to calculate the two-year period will be provided in the Tax Information Bulletin on the bright-line test legislation, but in most cases the holding period will begin on the date the person’s title to the residential land is registered under the Land Transfer Act 1952, and will end on the date that the person enters into the agreement for the disposal of the residential land.

The bright-line test contains an exception, if the residential land being disposed of is the vendor’s main home. The exception is not available for the purposes of the RLWT as it will only apply to offshore persons, and it is unlikely that the property being sold would be an offshore person’s main home.

However, there will be an exemption or rollover relief from RLWT for inherited property and for transfers of relationship property, as provided under the bright-line test. This is achieved under section RL 1(2)(a), which refers to an amount that is, or would be “income” under section CB 6A but for the main home exception in section CB 16A.

A disposal of New Zealand residential land that is income for the vendor under both section CB 6A and another provision of the Income Tax Act 2007 (for example, the intention test) will be subject to RLWT.

Offshore persons

Under new section RL 1(2)(b), the vendor must be an “offshore person” for RLWT to apply. “Offshore person” is defined in section YA 1 and covers both individuals and non-individuals, such as companies or trusts.

Individuals

An individual will be an “offshore person” if they are not a New Zealand citizen and do not hold a New Zealand residence class visa as defined in the Immigration Act 2009. A residence class visa is a resident visa and or a permanent resident visa.

A New Zealand citizen will nevertheless be an offshore person if they are outside New Zealand and have not been in New Zealand within the last three years.

A holder of a New Zealand residence class visa will be an offshore person if they are outside New Zealand and have not been in New Zealand within the last 12 months.

In most cases it is likely that a New Zealand citizen or holder of a residence class visa who is selling their property within two years could satisfy the proof requirement by meeting with their New Zealand conveyancing agent in person and showing them their passport. The conveyancing agent would be able to copy the documentation and record that they have seen the person in New Zealand. As the vendor is currently in New Zealand, this means they would not be “an offshore” person.

If an individual is selling their property from outside New Zealand, a certified statement or other suitable proof from the vendor that they are not an offshore person should be provided to their conveyancing agent. This could include evidence of flights to New Zealand within the relevant timeframe.

The withholding tax will apply when two or more individuals jointly own a property, and at least one of them is an offshore person. This will help to ensure the integrity of the RLWT rules.

Further information can be found in the section titled “Information requirements”.

Non-individuals (including companies)

A non-natural person will be considered to be an offshore person if any of the following conditions are met:

• it is incorporated outside New Zealand
• it is registered outside New Zealand
• it is constituted under foreign law
• it has a member that is an offshore person
• it has an executive or director that is an offshore person
• it is a company and 25 percent or more of the company’s shareholder decision-making rights are held directly or indirectly by offshore persons.

Accordingly, for a company (including a unit trust) to qualify for the non-offshore exemption, the following conditions must all be met:

• the company is registered in New Zealand; and
• all directors of the company are non-offshore individuals; and
• no more than 25 percent of the shareholder decision-making rights of the company are held by offshore persons.

This could be satisfied, for example, by proof such as:

• a copy of the company’s New Zealand registration; and
• a copy of each director’s New Zealand passport or residence class visa sighted during a meeting with the conveyancing agent; and
• a statement from each director that, to their knowledge, no more than 25 percent of the shareholder decision-making rights of the company are held by offshore persons.

Further information can be found in the section titled “Information requirements”.

A partnership will be an “offshore person” for the purpose of the RLWT rules if at least one of the partners is an offshore person.

A discretionary trust will be considered an offshore person if any of the trustees is an offshore person.

A discretionary trust will also be considered an offshore person if any settlor of the trust is an offshore person. This is to prevent the situation of a trust with an offshore settlor and resident trustees selling the property (without being subject to a withholding tax), with the settlor then replacing resident trustees with trustees who are offshore persons and beyond the reach of Inland Revenue. This requirement is consistent with the settlor focus in New Zealand’s income tax rules.

In addition, the trustees of a discretionary trust have the ability to shift the tax liability to one of the beneficiaries by distributing the income to the beneficiary and treating it as beneficiary income. To ensure that the gain does not escape tax by being transferred to an offshore beneficiary, a trust will be an offshore person if:

• all natural person beneficiaries and all natural person discretionary beneficiaries of the trust are offshore persons;
• all beneficiaries and discretionary beneficiaries of the trust are offshore persons; or
• one or more of the beneficiaries are offshore persons, and the offshore beneficiary received a distribution from the trust within the last six years of a relevant disposal of residential land.

The definition of “offshore person” for the purposes of the RLWT rules has been designed so that it will not normally apply to properties held in ordinary family trusts where some of the beneficiaries may be New Zealand citizens but now reside overseas.

To prevent a trust being set up in which all beneficiaries are foreign investors who are natural persons, with a New Zealand charity appointed as a discretionary beneficiary simply to avoid being classed as an “offshore person”, the definition of “offshore person” includes the situation where all natural person beneficiaries and natural person discretionary beneficiaries are treated as “offshore persons”.

A corporate trustee will be able to qualify for the non-offshore exemption if it meets both the company and trust criteria above.