Property transactions; Taxing times for lawyers, clients

It has been an interesting time being a law firm involved in a significant number of recent property transfers. The Government, in an effort to curb rampant Auckland property investment, announced a new “bright-line test” which requires income tax to be paid on any capital gains made when selling residential property.

The bright-line test, implemented by the Inland Revenue Department, requires income tax to be paid on any capital gains made from the sale of residential property purchased and sold within two years, with some exceptions (the main exception being where the property qualifies as your main family home).

This applies to all property acquired after October 1, 2015 and sold within two years of the date of acquisition.

Due to the introduction of the bright-line test, lawyers are now required to obtain tax information from purchasers and vendors on the acquisition or sale of property.

To enable lawyers to fulfil those obligations, all clients will need to complete a tax statement and provide confirmation of their IRD numbers to their lawyer.

Please note that if your property is owned or is to be owned by a trust or company you will need to acquire an IRD number for your trust or company, if it does not already have one, prior to any proposed settlement date.

In order for the bright-line test to be effective the IRD has also introduced a Resident Land Withholding Tax regime (RLWT).

As with the bright-line test, this applies to residential property transactions in New Zealand where the property is acquired after October 1, 2015 and sold within two years of acquisition. Where a vendor is deemed an offshore RLWT person, lawyers are obliged to account to the IRD on settlement for the assessed RLWT out of the proceeds of sale.

For the purpose of this regime, an offshore RLWT person can be an individual (including a New Zealand citizen who has not been in New Zealand at any stage in the three years immediately prior to the sale), company, trust or partnership.

Your company, trust or partnership may be deemed an offshore person if more than 25% of the directors, shareholders, trustees or partners are offshore RLWT persons (and in the case of trusts – where any beneficiary is an offshore RLWT person).

If you believe that you, your company, trust or partnership may be considered an offshore RLWT person it is important that you take advice and determine your RLWT status before entering into any Agreement for Sale & Purchase of Real Estate to avoid any ‘surprises’ in terms of your tax liabilities.

So, regardless of whether you are looking at buying or selling property you should, at the outset, speak to your lawyer or accountant about the new tax regime in respect of property
transfers and how the new tax rules could apply to you.

  • Director at Fencible Law, Richard Galbraith, talks about the implementation of tax on capital gains from sale of residential property