Taxing land transactions: where’s the bright side?

On 1 October some of the most significant changes to taxing land and property transactions since the abolition of stamp duty, came into force. Philippa O’Mara says the legislation has ramifications for all individuals, whether in business or not.

The purpose of the new legislation on land and property transactions is to clarify existing rules and create a mechanism to collect information to enforce the rules. Although lawyers will be filing the required documents, all parties to transactions need to be geared up with the right information. There’re two separate pieces of legislation that apply from 1 October 2015:

• Capture information on overseas buyers of property.
• Clarify when a profit on residential property is taxable.

Provision of tax number for sale of property
From 1 October 2015 lawyers will have to prepare a new “Tax Statement” for all transfers of land and property. This document will be sent with other transfer documentation to LINZ at the time of the property transfer. The tax information provided to LINZ will not be publicly available. At this stage we do know some of the elements:

• All parties must provide an IRD number whether resident and non-resident; and • A person resident overseas will have to provide a Tax Identification Number.

So no IRD number, no conveyance of title, unless one of the parties falls under the exemption. The legislation clarifies when a person is an overseas resident – they’ll be known as an “Offshore Person”. They’ll need a New Zealand bank account to get an IRD number. This definition will include individual New Zealand citizens who’ve been outside the country continually for the past three years or more, persons with resident visa but outside New Zealand for the past 12 months or more, or any other person who is not a New Zealand citizen and doesn’t hold a resident visa.

If the transaction involves a New Zealand resident individual and is in relation to their ‘Main Home’, then they won’t have to provide their IRD number. However, there’re some hooks including: what is defined as “Main Home”, the exemption applying only once at a time and not applying to a residence on a commercial farm. More importantly the exemption is not available if the property is owned or to be owned by a trust, including transfer on death to an estate. This means all trusts will need to have IRD numbers. So overall, trustee buyers and sellers will need to prepare for the timing of a transaction.

Two Year Bright-line Test*
The second piece of legislation has been passed to run alongside the current test of “intention of resale” because this subjective test is hard to enforce. The new rule is unambiguous:

“A disposal of residential property within two years of acquisition will be taxable unless an exemption applies.”

The Bright Line legislation also has a Main Home Exemption. The definition is different to the legislation on providing an IRD number when buying and selling property.
Further details of the Bright Line Main Home Exemption are as follows:

• It will only apply to one property at a time.
• Property can be owned by a trust so long as beneficiaries occupy.
• Actual use is key and, in the case of multiple properties, such things as the time spent at the dwelling, where the social ties are strongest, person’s employment, business interest, personal property kept in the dwelling, will be taken into account.
• The rule will not apply to inherited and relationship property.

If the sale is taxed, then the sale price will be reduced by costs such as legal, valuers etc and holding costs (interest, insurance, etc). The IRD’s proposing that losses are ring-fenced and carried forward to offset against future land sale gains.

The IRD is also looking to apply a residential land withholding tax from 1 July 2016, thereby deducting upfront from property sales by offshore persons subject to this new test.

Overall, the two pieces of legislation will make big changes to the work required to purchase and sell a property and all individuals need to gear themselves up for providing the information to complete a property transaction.

*A bright-line rule (test) is a clearly defined rule or standard, composed of objective factors, which leaves little or no room for varying interpretation. The purpose of a bright-line rule is to produce predictable and consistent results in its application. – Wikipedia.