RLWT: Does the Residential Land Withholding Tax affect you?

If you have a job, you know about PAYE tax deductions. PAYE tax is deducted from your wages by your employer and paid directly to IRD. If you have a term deposit, you will know about resident withholding tax. The bank deducts tax on the interest income you earn and pays it to IRD.

And now we have Residential Land Withholding Tax (RLWT). The Act will take effect on 1 July 2016 and it only applies to “offshore persons” .

So who is an offshore person?

The most important thing is to find out whether the new law applies to you. And it begins with whether or not you are an offshore person.

An offshore person includes:

  • NZ Citizens who live overseas and have not been in the country for the previous 3 years.
  • Individuals who have a NZ residence visa but have not been in New Zealand for the last 12 months
  • Anyone who is not a NZ citizen and does not hold a NZ residence visa
  • Any companies or trusts set up outside NZ
  • Any companies or trusts set up in NZ but are owned 25% or more by offshore persons.

Even if you are determined to be an offshore person, Residential Land Withholding Tax will only be deducted if your situation meets the following criteria.

Residential Land Withholding Tax Criteria

Officially, from 1 July 2016, Residential Land Withholding Tax will be deducted from the sales proceeds if:

  1. the seller is an “offshore person” and,
  2. bought the residential property after 1 October 2015 and,
  3. owned it for less than two years, then the Residential Land Withholding Tax will apply.

How it works

If the seller meets the above 3 requirements, then

  1. When the vendor’s solicitor receives the money from the buyer on settlement, the vendor’s solicitor will deduct the amount of Residential Land Withholding Tax and pay it to IRD.
  2. If the vendor does not have a solicitor or conveyancer, then the buyer’s solicitor must play the role and deduct the Residential Land Withholding Tax before paying the purchase price to the vendor.
  3. In either case, if the solicitor forgot to deduct the Residential Land Withholding Tax, the vendor will still be liable to pay the Residential Land Withholding Tax to IRD.

What would the Residential Land Withholding Tax rate be?

It will the lower of the following 2 options

  1. 33% of the seller’s gain
  2. 10% of the agreed sales price between the buyer and vendor.

For example, Jack Chen is an offshore person and he bought a house in Wellington on 1 November 2015 for $900,000 and sold it to Linda Murphy on 28 February 2016 for $1 million.  Jack Chen will be liable for Residential Land Withholding Tax because

  1. He is an offshore person and,
  2. He bought the house in Wellington after 1/10/15 and,
  3. He owned it for less than 2 years.

The Residential Land Withholding Tax he has to pay is the lower of:

  1. 33% of his gain:

If Jack Chen sold the house for $1 million and bought it for $900,000, he made a gain of $100,000 . So 33% of $100,000 is $33,000

  1. 10% of the purchase price:

$1 million x 10% = $100,000

The lower of the two is $33,000 which is the Residential Land Withholding Tax paid to IRD.

Residential Land Withholding Tax example

When Linda Murphy pays $1 million to Jack Chen’s solicitor, Jack Chen’s solicitor will pay $33,000 to IRD on behalf of Jack. If there are no rates to apportion and no mortgage to pay, the remaining balance $967,000 will be paid to Jack Chen.

So there you go, this example shows the NZ tax legislation affects property owners is constantly evolving and so it pays to stay updated on new property tax issues.

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For other thoughts and suggestions you can email me (Edward Yip) at info@propertyguide360.co.nz.

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