On Sunday 17 May 2015 the Government announced proposed changes to the tax
rules for property investments (land) as a pre-cursor to its Budget 2015
package. The proposals include a tax on gains from the sale of residential
property held for less than two years (subject to exceptions) and new
information requirements for those who acquire or dispose of New Zealand
property. The proposed rules are to apply from 1 October 2015.
Proposed two year rule
The proposal which will give rise to most debate is the proposal to tax gains
from the sale of residential property sold within two years of acquisition. Such
properties will be deemed to be held on revenue account for income tax purposes
even if they are not acquired for the purpose of resale, unless the
is the seller’s main home;
is inherited from a deceased estate; or
is sold as part of a relationship property agreement.
The rule will apply to properties acquired on or after 1 October 2015, which
is in alignment with the commencement date for the new 30% LVR rules for
investment properties. The proposed rule will apply to both New Zealand
residents and non-residents.
The rule will supplement the existing provisions which apply to property
acquired for resale. Gains on the sale of property held more than two years will
therefore remain subject to income tax if the property was acquired with the
“intention” of sale (applying the existing rules relating to ascertaining
Supplementing the proposed two year rule are information measures relating to
ownership of New Zealand property by residents and non-residents.
Residents and non-residents buying and selling New Zealand property will be
required to provide an IRD number as part of the usual Land Information New
Zealand transfer process (unless the property is their main home). Many
non-resident property owners will not have an IRD number and will need to apply
for one to meet this requirement.
Under the proposals a non-resident will need to have a New Zealand bank
account in order to obtain an IRD number and therefore comply with the new
requirements. Non-residents will also be required to provide their tax
identification number from their home jurisdiction along with specified
identification (e.g. a passport).
These information requirements are intended to provide the IRD with the means
to enforce the proposed two year rule and existing tax rules.
Possible land withholding tax for non-residents
The Government has also signalled its intention to investigate a withholding
tax for non-resident property owners. A withholding tax is suggested as a
potentially appropriate way of ensuring that non-residents pay what is due in
respect of their New Zealand property investments. The withholding tax is
signalled to apply from mid-2016, if implemented.
To date the Government has only released general information on the proposals
in an IRD fact sheet. The next step in the process will be the release
of an IRD “issues paper” in July for public comment. Draft legislation is
signalled for late August.
The two year rule is arguably the most significant change to the land tax
rules proposed in the last decade, but many of the key details remain unknown at
this stage. The definition adopted to narrow the two year rule to residential
properties will be of critical importance. The treatment of transfers between
associated persons (e.g. from an individual to their family trust) will also
need to be evaluated when more detail is released. The extent to which this rule
will contribute to more affordable housing remains uncertain.
If the Government introduces a withholding tax for non-residents then the
scope of the withholding obligation will be of critical importance. Whether the
withholding is imposed on the vendor, or perhaps the real estate agent acting in
respect of the sale, will be important. Sale and purchase agreements will need
to accommodate these requirements and allocate risk in relation to the
imposition of this withholding tax.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.