Residential Property Withholding Tax
This is not a new tax, rather it is a new instrument to collect tax. The rationale is that as it can be more difficult to collect tax from people speculating on property in New Zealand if the seller lives overseas.
Glaister Ennor has been following the evolution of these proposals and has contributed to initial submissions to government via the Auckland District Law Society Property Law Committee with which we are involved.
While we have many concerns around this blunt instrument for the collection of tax, we are especially concerned with the potential negative impact on our residential property developer clients.
This withholding tax will apply to “offshore” persons. An offshore person includes a company that has 25% or more offshore share ownership. This will catch many of our residential property developer clients.
The Residential Land Withholding Tax is to be withheld at a rate that is the lower of 33% of the seller’s gain (total purchase price minus seller’s acquisition price) and 10% of the total purchase price for the property. For our residential property developers this means the withholding tax is likely to detrimentally affect debt repayment abilities and prevent investment of settlement proceeds back in the development works.
The standard rate deduction of 33% (of the total purchase price minus the seller’s acquisitions price) will almost always result in an over-payment of tax for developers, especially those investing in brown field developments where costs of the ground remediation earthworks, and provisioning services are substantial. This will also have the detrimental effect of creating an additional costs burden as alternate funding would be needed by developers in the period between the settlement and the tax return being filed to cover the tax deduction (not to mention the lag in receiving refunds).
In addition, we have concerns about the possible additional lending restrictions that the banks are likely to impose on investors and developers that may be deemed off-shore persons. There are also issues of priority for payments in that real estate agents, mortgagees, the vendors’ solicitors, and the IRD in terms of both income tax and GST may also be competing for sale proceeds. We also have concerns about the possible definition of “residential land” and what that might include.
We will continue to watch the progress of this legislation with interest. We will be inviting our residential developer clients to become involved in this process if these initial and serious concerns are not adequately addressed in the next round. If you are concerned or interested, or wish to obtain a better understanding of these proposals and how they might affect your business please contact Nicola Harrison.
Source: InBrief SPRING 2015
Author: Nicola Harrison