Yesterday the Government introduced to the House the "Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill", another one of those catchy titles. Anyway, this is the one that has the proposed withholding tax on "Offshore persons", who are caught within the Bright-line rules (the taxation of residential property if sold within 2 years). Incidentally that legislation received Royal Assent yesterday.
We've already written about the tax changes, and you can read these on our blog page. But this new Bill has the detail behind the RLWT, which is intended to come into effect on 1 July 2016. Some eye catching changes (to catch you off guard) include the following:
- Trusts with non-resident settlors, non-resident trustees will fall into the definition of Offshore persons, and subject to RLWT, and if it has non-resident beneficiaries the trust may also be caught
- Partnerships with at least one Offshore person, will be subject to RLWT
- If any entity has at least one Offshore person as an executive office holder or director it will itself be an Offshore person
- The person responsible for deducting the RLWT, in most cases will be the vendor's solicitor, but it may fall to the purchaser's solicitor, or where the transaction is between "associated persons" it switches to the purchaser to deduct the RLWT
- There is now proposed a 3rd option for calculating RLWT: if the standard rate or the default rate would result in insufficient funds being available to clear a registered security, the RLWT will be limited to the funds available post repayment of the registered security (not a 'tax' on the funds, the whole funds)
- The person responsible for deducting the RLWT will need to follow Inland Revenue prescribed information gathering to confirm that a person is NOT an Offshore person - and that information will probably need to be in the form of certified documents
- If a person (e.g. solicitor) had an obligation to deduct RLWT and did not, the Inland Revenue can (read 'will') refer a complaint to their "relevant professional body appropriate details of an failure by 1 of its members to satisfy, as agent, a person's liability to pay RLWT in accordance with the RLWT rules".
We are concerned that vendors (or purchasers) will not know or appreciate the complexity of the rules, and neither will their solicitors. The "associated persons" rules are very complex, yet are critical to who has the withholding obligation. How can a vendor give a certified statement as to their offshore status and their relationship to the purchaser if they don't know how those complex terms are defined?
We are disturbed with the inclusion of trusts in the definition of Offshore persons with such a wide definition. Just because a settlor or a trustee may live overseas (note this is not a case where all the settlors or all trustees live overseas), or a beneficiary lives overseas and received a "distribution" within the past 6 years seems onerous, especially if the trust is a New Zealand "Complying Trust" in all other respects.
Overall, there is too much complexity in this Bill and it relies upon vendors, purchasers and their solicitors to understand very complex tax laws. And the result will be "if in doubt, tax it!" After all, if you are a solicitor with the threat of being investigated by the New Zealand Law Society, what would you do?
Finally we just happen to have noticed there is a HUGE loophole in the definition of "Offshore persons", if the definition is interpreted as suggested in the commentary to the Bill. Like many things in life, if you are up to no good, you know all the loopholes. If you are innocently going about your business you don't!
In the meantime, if you are buying or selling residential property (or contracts over residential property) in New Zealand, you need to appreciate that your legal bill will increase as the compliance costs increase.
The comments in this paper are the personal opinion of the writer and are not necessarily the opinions of Shellock Consulting Ltd.