Chapter 7 - Tax credits and filing a tax return

7.1 New Zealand tax residents are required to pay tax in New Zealand on their worldwide income, while non-residents are only taxed on their New Zealand-sourced income.

7.2 A person’s final income tax liability under the proposed bright-line test arises whether or not they are a New Zealand tax resident. In the case of non-residents, New Zealand would only tax New Zealand-sourced residential property gains. Section YD 4(12) in the Income Tax Act 2007 provides that income derived from the disposal of property situated in New Zealand has a source in New Zealand. In the case of New Zealand tax residents, worldwide residential property gains would be taxable in New Zealand.

7.3 One of the differences between the proposed bright-line test and the RLWT is that the RLWT only applies to sales of residential land by “offshore persons”. It is expected that a large number of taxpayers with tax liabilities arising under the bright-line test would not have RLWT withheld.

7.4 Regardless of whether RLWT has been withheld, taxpayers with tax liabilities arising under the bright-line test would be required to file an income tax return.

7.5 Where RLWT has been withheld, the amount of RLWT withheld would not be final. The vendor should be able to claim a tax credit for the amount of RLWT withheld and paid to the Commissioner against their final income tax liability in relation to the sale of the residential property. The rationale for this is that the RLWT is intended to assist in collecting tax arising under the bright-line test and is not intended to be a final tax.

7.6 We acknowledge that when the final tax liability is calculated, the default rate could result in over-taxation. Allowing the use of the standard withholding rate should reduce the extent of over-taxation in most situations, because the standard rate should generally result in a lower amount being withheld than under the default rate. But even then, if too much tax has been withheld, the vendor must file an income tax return to claim the difference as a refund or use it as a credit to offset some other tax obligation (this will usually be the case where the vendor has deductible expenses to claim in relation to the property). Likewise, if more tax is owing than the amount of tax withheld, the vendor must file an income tax return and pay the additional tax.

7.7 We also suggest that taxpayers should be able to file an interim income tax return (depending on the circumstances) in order to obtain an RLWT refund, in the event that the amount of RLWT withheld exceeds the taxpayer’s final tax liability for the sale.

7.8 Where a loss has been made (i.e. the vendor’s original acquisition cost exceeds the total purchase price), no withholding under the RLWT would be required. In this case, there is no over-taxation, but an income tax return would need to be filed in order to calculate losses.

7.9 Where a taxpayer has ring-fenced losses[5] carried forward from previous sales under the bright-line test, these losses should be used first to offset the person’s taxable income in relation to the property sale. Any amount withheld as RLWT would be creditable against the person’s final income tax liability. Where losses are utilised and there is no need to offset some or all of the RLWT against the income tax liability, the remaining RLWT should be refunded.

7.10 However, for an RLWT credit or refund to be available, the RLWT must be withheld and paid to the Commissioner.[6] This is to protect the integrity of the tax system and to prevent gaming where a credit or refund is issued, but the RLWT has not been withheld and paid to the Commissioner.

[5] The proposed bright-line test ring-fences losses so they can only be used to offset gains on other land sales that are taxable under any of the land sale provisions.

[6] As discussed in chapter 5, it would be possible for withholding agents to pay amounts of withheld RLWT to the Commissioner on a monthly or transaction-by-transaction basis. There may be cases where the vendor would like to file an interim income tax return shortly after settlement in order to obtain an RLWT refund. It would be up to the vendor and purchaser to come to an agreement that RLWT should be paid to the Commissioner as soon as possible, so that the vendor is able to obtain their refund without substantial delay.