Residential Land Withholding tax...Means another new Agreement for Sale and Purchase

There has been yet another update giving us a new Agreement for Sale and Purchase (Ninth Edition 2012 (5)).  The key changes are as follows:

Fixing numerical errors:

This Agreement fixes the numbering errors contained in the previous version 4.

Residential Land Withholding Tax – what you need to know:

The main change to the new Agreement is that it provides for new legislation regarding Residential Land Withholding Tax.

What is this new legislation about? 

Essentially this legislation is to ensure that the IRD captures any “capital gains” tax from an “offshore person” from the settlement funds.

This legislation captures property bought and sold within a two year (“brightline”) period.  Important dates to be aware of are:

• If the Agreement for Sale and Purchase is dated prior to 1 October 2015, the “brightline” does not apply.
• The two year “brightline” period runs from the date of registration (of the purchase) to the date of the Agreement for Sale and Purchase (of the sale).

If the vendor is caught by this “brightline” test, the next step is to see if they fall within the category of being an “offshore person”.

Who is an “offshore person”? 

• A New Zealand citizen who has not been in New Zealand for the last 3 years; or
• A New Zealand resident (i.e. holds a New Zealand Resident Visa) who has not been in New Zealand for the last 12 months.
• A person who is not a New Zealand resident or a New Zealand citizen.

If the sale is caught by this “brightline” test, but the vendor is not classified as being an “offshore person” the vendor’s lawyer will need to have the vendor sign additional documentation confirming this as well as obtaining proof (for example a copy of the vendor’s passport showing when they were last in New Zealand if they are currently residing overseas).

If the vendor is classified as being an “offshore person”, then the vendor’s solicitor is responsible for calculating and retaining the residential land withholding tax as well as paying this to the IRD from the settlement funds. 

How is the residential land withholding tax calculated?  This is the lessor of the following:

• 33% (or 28% for a company or trust) of the current purchase price, less the vendor’s acquisition price; or
• 10% of current purchase price; or
• The current purchase price, less repayment of mortgage amount and less any outstanding rates.  It is important to note that real estate agent fees, body corporate levies and legal costs cannot be deducted from the purchase price when using this method of calculation.  It could be easy for the vendor to be caught short when using this method.  This could result in an agent not being able to have the commission paid from the settlement funds!

If you have any questions about this new legislation, please feel free to contact us to discuss this further.