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Residential Withholding Tax on offshore persons - could it affect you?

From 1st July 2016 - a new tax relating to residential property will be in force.  This tax (the Residential Land Withholding Tax RLWT) applies to 'overseas investors'.  BUT it is important to note the definition of 'overseas in this legislation - IT COULD APPLY TO YOUR ENTITY.

From 1st July - any entity that has an overseas connection will be subject to this RLWT if they sell residential property within two years of acquisition.  This tax has been designed and developed to try and slow down the accelerating property prices in New Zealand.  But because of the definitions, if your entity has an 'overseas connection' it could be caught and be liable for tax.  This tax is payable at the marginal tax rate of the entity.

Chapman Tripp have outlined their understanding of what an overseas person is on their Brief Counsel.  We have copied it below for you (for more information - please check out their website).

Offshore RLWT person

The definition of “offshore RLWT person” is wider than the definition of “offshore person” in the Overseas Investment Act and under the recently enacted property tax statements regime.  Even where the owner of a property appears to be in New Zealand, it will be necessary for conveyancing agents to ask their clients detailed questions about their factual circumstances to determine whether RLWT applies.

An individual will be an “offshore RLWT person” if he or she:

  • is a New Zealand citizen who has not been in New Zealand within the last three years
  • holds a residence class visa and has not been in New Zealand within the last 12 months, or
  • is not a New Zealand citizen and does not hold a residence class visa.

A company or partnership will be an “offshore RLWT person” if:

  • it is incorporated or registered outside New Zealand or constituted under foreign law
  • it is controlled (directly or indirectly) by more than 25% offshore RLWT persons, or
  • more than 25% of its directors or general partners are offshore RLWT persons.

Many New Zealand companies will be caught by these rules.  For example, a New Zealand company with three directors, one of whom is Australian, could mean the company is subject to the RLWT rules.  New Zealand subsidiaries of multinationals will almost certainly be “offshore RLWT persons”.

The rules applying to trusts are even broader.  In addition to looking at the offshore status of each of the trustees, settlors and beneficiaries ­­­– any of whom could result in “offshore RLWT person” status for the trust ­­­– the RLWT rules will apply to a trust where:

  • a beneficiary who is an individual and an offshore RLWT person who has received a distribution from the trust in one of the last four years of more than $5,000, or
  • the trust has disposed of any other residential land within the last four years and the trust has any beneficiary that is an offshore RLWT person (even if no distributions have been made from the trust).

These are the RLWT rules (thanks to Chapman Tripp for the summary):

Broadly speaking the RLWT regime will require a conveyancing agent for an offshore RLWT person selling residential property to withhold RLWT from the purchase price and pay it to Inland Revenue before releasing funds where:
  • the property is residential property (which includes bare land zoned residential) located in New Zealand, and
  • the property is disposed of within two years of acquisition (provided the property was acquired on or after 1 October 2015).
Where RLWT applies, the vendor’s conveyancing agent is required to withhold the lesser of:
  • 33% (or 28% in the case of companies) of the vendor’s gain, or
  • 10% of the vendor’s gross sales price.
The vendor’s gain is calculated solely based on the current sales price less the original purchase price.  Improvements and other deductible expenses are not included in calculating the gain subject to RLWT.

For more information, here is the Special Report from Policy and Strategy, Inland Review: 2016-sr-residential-land-withholding-tax.

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