No doubt you’ve heard about the booming Auckland property market whose reach is now extending into the provinces. You might have heard about the government’s intention to improve tax compliance by introducing a “bright line” test to tax gains from the sale of residential property within two years of its purchase. What is not so well known is the requirement from 1 October 2015 for sellers and buyers of all types of land (not only residential land) to provide their IRD numbers as part of the land transfer process, unless they are eligible to claim the main home exemption.
The “bright line” test
The first major change is the introduction of a tax on gains from the sale of residential property sold within two years of purchase (unless you qualify for an exemption). This is a “bright line test”. A bright line test provides a clearly defined rule which leaves little or no room for varying interpretation. There is no room for argument as to whether the gain is taxable or not. You’re either selling in the two year period or you’re not.
Your main home is exempted from the bright line test unless you use the main home exemption more than twice in any two year period. Also exempted from the bright line test are transfers of inherited land and transfers as part of a relationship property settlement. Residential land owned by a trust can qualify for the main home exemption, but only if the property is the main home of a beneficiary and the person who has settled the most by value on the trust does not own a main home. The main home exemption will not apply to another property owned by the trust in which another beneficiary resides.
The law imposing the bright line test has not yet been passed even though it will apply to all residential properties bought after 1 October 2015. The bright line test adds to and does not replace the existing tax rules. If you sell outside the two year bright line period, you could still be liable to pay tax under existing rules – for example, if you buy a property with the intention of selling it for gain.
Land transfer system now collecting information for IRD
The second major law change from 1 October 2015, is the requirement for Land Information New Zealand (LINZ) to collect additional information which will be passed on to Inland Revenue. (LINZ is the government department responsible for land related responsibilities, including the online transfer of land titles.)
If you are buying and selling land from 1 October 2015 you must:
- Provide a “Tax Statement” (except where your land is Maori land, part of a Treaty of Waitangi settlement, or is for any contract signed before 1 October 2015 provided the transfer is registered on or before 1 April 2016)
- Provide your IRD number (except if you are eligible for the main home exemption. If you are an “Off Shore” person or your trust is buying or selling, you can’t claim the main home exemption so you will need to obtain an IRD number)
- Obtain a NZ bank account so you can obtain an IRD number (if you are an “Off Shore” person)
- Provide your Tax Identification Number (TIN) as well as your IRD number (if you are an overseas tax resident).
Although the changes have generally been welcomed as a move to improve compliance with the Income Tax Act 2007 and to enable statistical analysis of foreign ownership of residential land in New Zealand, there are downsides. The responsibility for gathering the information will rest with lawyers and conveyancers. This will inevitably lead to increased costs. For many their position under the new laws will be simple, but for many others the complexity of the rules will mean the need for professional advice.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.