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New Zealand's tax office (Internal Revenue Department, IRD) has accepted criticisms that the new residential land withholding tax (RLWT), to be imposed on offshore owners of residential property, is drafted too widely and will inadvertently catch some groups of residents.

The tax, to be introduced in mid-2016, is intended to act as a guarantee that offshore property speculators pay capital gains tax. It is intended to apply only to overseas vendors who sell a residential property within two years of purchase, and where the land was acquired on or after 1 October 2015.

Effect on trusts

Several organizations representing lawyers and accountants had submitted comments opposing the new tax rules as 'incoherent and inconsistent'. Someone pointed out that the IRD's definition of 'offshore person' could capture New Zealand tax residents whose home is owned by a family trust with one family member living abroad. Anomalies would also arise in cases where one of the discretionary beneficiaries of a trust were an 'offshore person' and had received a distribution. The rule as proposed would mean that an offshore beneficiary who has received any distribution in the last six years would result in the trust being an offshore trust.

IRD amendments

The bill implementing the levy – the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill – was reported back to parliament on 21 March. The report by IRD officials agrees to modify the wording of certain clauses, mainly relating to properties owned by trusts.

The IRD said it had chosen its definition of 'offshore person' to make the rules clearer for withholders, but agreed that the result was that it applied more widely than initially intended and that some vendors, especially trusts and companies, would thus have tax incorrectly withheld.

They have now agreed to modify the definition of 'offshore person' for trusts by restricting it to trusts where more than 25 percent of the trustees are offshore persons. Similarly, instead of requiring all directors not to be offshore persons, the company should only be considered offshore if more than 25 percent of directors are offshore.

Regarding discretionary trusts, the IRD said its intention was that trusts that own the family home should not be an offshore trust solely because some of the beneficiaries were offshore (for example, adult children working overseas). It agreed to amend the bill such that a trust becomes an 'offshore person' where an offshore beneficiary has received NZD5,000 or more from the trust in any one year during the past four years. However, IRD officials have concerns with the possible misuse of trusts to evade payment of RLWT. They therefore also insisted that distributions of any amount to a non-natural beneficiary – i.e. an offshore company – would automatically trigger offshore person status, and thus a withholding tax liability, for the trust.

The IRD also agreed to drop the word 'settlor' from its definition of offshore trust, and replace it with 'a person who has the power to appoint trustees or amend the trust deed'. However they will monitor the situation to ensure that there is no abuse of this concession.

A proposal from accountancy firm KPMG to exempt residents' main homes from the withholding tax was rejected. In the interests of enforceability, they said, it was more appropriate to keep the sale of a main home subject to the withholding tax, and allow vendors to reclaim it afterwards if they really were entitled to the main home exemption.

The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.

Published on our website on Mar.22, 2016