Chapter 2 - Background
Proposed bright-line test
2.1 As part of Budget 2015, the Government announced that it would introduce a “bright-line” test on the sale of residential property. The test will require income tax to be paid on any gains from the sale of residential property that is bought and sold within two years, with some exceptions. The new rule will apply to property acquired under an agreement for sale and purchase entered into on or after 1 October 2015.
2.2 The purpose of the bright-line test is to supplement the “intention test” in the current land sale rules. The intention test makes gains from the sale of real property purchased with an intention of disposal taxable. The intention test can be difficult to enforce due to its subjectivity. The bright-line test is intended to deal with the problem by supplementing the intention test with an objective test.
2.3 An issues paper on the design of the bright-line test was released in June 2015 and draft legislation was introduced on 24 August 2015 in the Taxation (Bright-line Test for Residential Land) Bill, following consultation on the issues paper.
2.4 The draft legislation proposes that:
- The bright-line test would apply to residential land for which an agreement for sale and purchase is entered into from 1 October 2015, and which is subsequently disposed of within two years. When the property was acquired other than by way of sale, the suggested bright-line test would apply to properties for which registration of title occurs after 1 October 2015.
- Residential land would be defined as:
- land that has a dwelling on it;
- land on which the seller is party to an arrangement to erect a dwelling; or
- bare land that because of its area and nature is capable of having a dwelling erected on it; but
- does not include land that is used predominantly as business premises or as farmland.
- An exception should apply if the property is the owner’s main home.
- An exception should apply for relationship property and inherited property.
- Deductions should be allowed pursuant to ordinary tax rules.
- Losses should only be able to be offset against other land-sale gains (“ring-fencing”).
- A specific anti-avoidance rule should be introduced in relation to the use of land-rich companies and trusts to circumvent the bright-line test.
Compliance and collection of taxes
2.5 New Zealand taxes its tax residents on their worldwide income. New Zealand taxes foreign investors on income that is sourced in New Zealand. When a foreign investor has a branch or controls a subsidiary in New Zealand, tax can be imposed on the income of that branch or subsidiary in the same way as it would be on New Zealanders. However, when the foreign investor does not have a New Zealand presence, it is more difficult for New Zealand to collect tax from that person.
2.6 The Commissioner of Inland Revenue (“the Commissioner”) has a number of powers to enforce the tax obligations of taxpayers to assist in the collection of taxes.[1] However, these are not always administratively practical or effective, particularly when the taxpayer has no presence in New Zealand.
2.7 New Zealand can request help to collect tax from foreign investors from overseas revenue authorities under its various international agreements, including the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, double tax agreements and tax information exchange agreements. These agreements allow for the exchange of tax-related information and assistance in the collection of taxes. While these are useful tools in enabling the Government to collect tax, they are a backstop and should not be the primary tool. As a practical matter, the most common and effective way to collect tax from foreign investors is a withholding tax.
Withholding taxes generally
2.8 Usually taxpayers file an income tax return which states the amount of their tax liability. The taxpayer pays their income tax once they have filed their tax return. However, in many situations that return–filing approach is supplemented, or is replaced by, a withholding tax.
2.9 Generally a withholding tax is an amount of tax that a person withholds when they make a payment to another person. The amount withheld is paid to the Commissioner and is the recipient’s (i.e. the payee’s) tax on the income from the payer. Withholding taxes are considered an important part of most tax administration systems because they ensure that the relevant tax is paid out of the amount due to the payee before the payee gets control of the funds. This makes it easier for the Commissioner to collect tax from taxpayers.
2.10 Withholding taxes are used to collect the tax liabilities of residents and non-residents alike, and can be non-final or final.
2.11 A non-final withholding tax is an estimate of the recipient’s final income tax liability and the recipient may be required to file an income tax return. The recipient is able to claim a credit for the tax that has been withheld. One example of a non-final withholding tax is pay as you earn (PAYE), whereby an amount is withheld from a person’s salary or wages on account of that person’s income tax liability.[2]
2.12 A final withholding tax represents the final tax liability for the person from whom the tax has been withheld. An example of a final withholding tax is New Zealand’s non-resident withholding tax (NRWT) regime in relation to certain types of passive income, such as dividends. The obligation to withhold NRWT is imposed on the payer, who is usually resident in New Zealand – which makes enforcement and collection easier.
2.13 The Commissioner has the ability to impose penalties on taxpayers who knowingly fail to deduct withholding tax from a payment they have made and on those who have withheld tax for any purpose other than for payment to the Commissioner.
2.14 While New Zealand does not currently have a withholding tax on property-related transactions involving non-residents, many other jurisdictions do – for example, Canada, Japan, and the United States. In addition, Australia has recently announced that it is introducing a withholding tax on sales of certain interests in land by foreign investors to support its capital gains tax.
2.15 In light of the proposed introduction of the bright-line test, we have considered whether the Commissioner’s current tools for collection are appropriate and adequate. Given the general difficulty faced in collecting tax from foreign investors with no physical presence in New Zealand, we suggest the introduction of a non-final withholding tax on certain property-related transactions is needed to improve the collection of revenue.
[1] The Commissioner may impose a number of monetary penalties, including, for example, late filing, shortfall, and late payment penalties. The Tax Administration Act 1994 sets out when and at what rates such penalties may be charged. This ensures that penalties for breaches of tax obligations are imposed impartially and consistently, at a level that is proportionate to the seriousness of the breach.
In addition, the Commissioner has powers available to recover amounts of unpaid tax. These powers include requiring deductions from payments made to the defaulter by any other person, and court action.
[2] In many cases, where a person earns only salary or wage income and PAYE has been withheld at the correct rate, the person is not required to file an income tax return. In such a case, PAYE is considered to be final.