New Zealand: Government announces measures for taxing gains from sales of residential property
As part of its 2015 Budget, the New Zealand government has announced new rules for taxing gains from the sale of residential property, as well as increased funding for Inland Revenue to enforce tax compliance regarding residential property transactions. The proposed new rules would supplement, rather than replace, current law. The proposals were announced against the backdrop of growing concern regarding housing affordability in New Zealand's major cities, and calls for the government to address speculation in residential property, which is seen as fuelling the overheated market.
New Zealand is a favourable jurisdiction for real estate investment. There is no stamp duty, and there is no general tax on capital gains.
New Zealand law does, however, contain a series of provisions deeming what would otherwise be a capital gain to be assessable. For example, a gain from disposing of land will be assessable if the land was acquired for a purpose or with an intention of disposing of it. Other deeming provisions apply to land acquired by persons in the business of dealing in land, developing land, dividing land into lots or erecting buildings (or persons associated with a person who is in such a business) and to land sold within 10 years of being acquired in certain circumstances.
The proposed measures will amend the definition of income (by introducing a 'bright-line' test deeming what might otherwise be a non-taxable capital gain to be income) and will introduce certain enforcement measures. The bright-line test is intended to avoid disputes about whether a person who has disposed of residential property acquired it for a purpose or with an intention of disposing of it. The enforcement measures are intended to make it easier for Inland Revenue to identify and locate persons liable for tax on gains made from disposing of residential property, particularly in the case of persons located outside New Zealand.
The proposed new bright line test would apply to both residents and non-residents buying and selling residential property. The new test will impose tax, at the seller's marginal income tax rate, on all gains from residential property sold within two years of purchase unless the property was the seller's main home, was inherited from a deceased person's estate, or is sold as part of a relationship property settlement. A seller will need to include any such gain in the seller's income tax return for the year of disposal. The government will consult on these changes from July, and intends that the new rules will apply to residential properties purchased on or after October 1 2015.
The enforcement measures are included in the Taxation (Land Information and Offshore Persons Information) Bill, introduced to the House of Representatives in late June. If enacted, the measures will require New Zealand residents and non-residents to provide a New Zealand tax file number (an 'IRD number') as part of the process of settling a sale of residential property. As now drafted, this requirement will not apply to a New Zealand person buying or selling his or her main home, unless the person is selling his or her third main home in a two-year period. Persons who are tax resident in another jurisdiction will also be required to provide the tax identification number issued by that jurisdiction, as well as current identification, such as a passport.
Finally, to ensure that New Zealand's anti-money laundering rules apply to non-residents before a residential property is purchased, under the Bill it is proposed that all 'offshore persons' will be required to have a New Zealand bank account before becoming eligible for a New Zealand IRD number. The Bill proposes defining 'offshore person' as: (i) a New Zealand citizen who is outside New Zealand and has not been in New Zealand within the previous three years; (ii) a person who holds a resident class visa but is outside New Zealand and has not been in New Zealand within the previous 1 year; or (iii) a person that is not a New Zealand citizen and does not hold a resident class visa. Whether a non-individual (including a company, partnership and trust) is an offshore person will depend on where the relevant entity is established and whether an offshore person owns or controls a 25% holding.
If enacted, the proposals contained in the Bill will apply from 1 October 2015.
Increased funding for Inland Revenue
The 2015 Budget also provides an extra NZ$29 million ($19.5 million) of funding specifically for Inland Revenue to increase its property tax compliance activities, taking its total budget in this area to NZ$62 million over the next five years. Inland Revenue has indicated that this additional funding will be used to target property speculation, particularly in Auckland and Christchurch.
Possible withholding tax for non-residents
The government has also announced it will investigate introducing a withholding tax for non-residents selling residential property, given the difficulty of tracking down overseas sellers of residential property that are found to owe tax to Inland Revenue. Officials will consult on the details of this proposal, with a view to introducing the withholding tax around the middle of 2016.
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