Inside this edition:
1. Residential Land Withholding Tax (RLWT)
2. Foreign Trust Review
3. Employee Share Schemes
1. RESIDENTIAL LAND WITHHOLDING TAX (RLWT)
Residential Land Withholding TAX (RLWT) will apply on certain disposals of land made by an “offshore RLWT person” on or after 01 July 2016 but only in relation to residential land acquired on or after 01 October 2015. In effect the RLWT is meant to be a collection mechanism for the Bright-line Test and consequently targets disposals of residential land within 2 years of acquisition.
RLWT will apply when:
• The property sold is “Residential Land” that is situated in NZ; and
• The vendor acquired the land on or after 01 October 2015; and
• The vendor has disposed of the residential land within the two year bright-line period; and
• The vendor is an “offshore RLWT person”
The Residential Land for the RLWT purposes means:
• Land that has a dwelling on it;
• Land for which the owner has an arrangement that relates to erecting a dwelling;
• Bare land that is zoned residential;
• Does not include land that is a farmland or that is used predominantly as business premises.
If the vendor is not taxed under bright-line test because another land taxing provision applies ( i.e. CB12, CB13, CB14) RLWT will still apply.
Offshore RLWT person is a crucial concept for the purposes of determining whether or not RLWT will need to be withheld in relation to the disposal of residential land. Offshore RLWT person includes:
• Non-NZ citizens and individuals who do not hold a NZ residence class visa granted under the Immigration Act. For example student and work visas are not resident visas.
• A holder of NZ residence class visa, that has not been in NZ within last 12 months.
• NZ citizens living overseas if they have not been present in NZ within the last 3 years.
The term “Offshore RLWT person” will extend to family trusts, companies and limited partnerships in following circumstances:
A company is an offshore RLWT person, if it is incorporated outside of NZ, or in case of NZ company if more than 25% of the directors or holders of the shareholder decision making rights are themselves offshore RLWT persons. In case of Limited Partnerships and Look Through Companies, a partnership is an offshore RLWT person if 25% or more of the General partners are offshore RLWT persons, and 25% or more of voting or income interests in the partnership or of the effective look through interests are held directly or indirectly by Offshore RLWT persons.
A New Zealand Trust will be an offshore RLWT person if:
• More than 25% of the trustees or persons with the power to appoint and remove trustees or vary the trust deed, are themselves offshore persons.
• The 25% threshold will not apply to beneficiaries. Irrespective of the status of the Trustees, the Trust could be considered an Offshore RLWT person in any of the following circumstances:
i) All of the beneficiaries (discretionary and non-discretionary) whether natural or not are offshore RLWT persons;
ii) A non-natural beneficiary, that is an offshore RLWT person, has received a distribution from the trust within the previous 4 years;
iii) A natural person beneficiary that is an offshore RLWT person has received a distributions from the trust totalling $ 5,000 or more in any of the preceding 4 years of relevant disposal of land;
iv) a beneficiary that is an offshore RLWT person and the trust has disposed of residential land within the previous 4 years of the current disposal.
In cases of partnerships or joint ventures, the “offshore RLWT person” status needs to be considered in relation to each partner or owner. So there may be situations where RLWT will apply to part of the transaction only and apportionment will need to be made.
There are specific exemptions/ roll over relief from RLWT for transfers of inherited and relationship property.
Furthermore, an exemption from RLWT can be applied by submitting form IR1103 to the IRD for in following circumstances:
i) If the person is in a business developing land, dividing land into lots or erecting buildings and has met all tax obligations (income, PAYE, GST, child support, Kiwisaver, etc) for the two years before applying for the exemption certificate; or the person is able to provide security to the IRD on account of income tax and will need to be for an amount that is the greater of: 10% of the estimated turnover from the sale of the properties or $ 50,000. The security can be provided by bank bond, mortgage over real property, or bond from a finance or insurance provider, etc.
ii) If a person is disposing of their main home, which would have to be used more than 50% of the time as the main home, and 50% or more of the area of the property is used as a main home. Supporting evidence that the property was used as the main home would need to be provided to IRD, such as water care/ power bills. No exemption will be available for the main home unless a valid RLWT Exemption certificate is obtained from the IRD. It should be noted that the exemption certificate must be obtained prior to the disposal of the property.
As RLWT applies to “offshore RLWT persons” the main home exemption will apply in limited cases.
RLWT tax payable
The obligation to pay RLWT primarily lies with the vendor’s conveyance or solicitor. If the vendor does not have a conveyancer or solicitor, the obligation to pay RLWT lies with the purchaser’s conveyancer or solicitor. If neither party has a conveyance, the obligation to pay RLWT rests with the purchaser. In these situations the person with withholding obligations is referred to as the “Paying Agent”. In case where the vendor and the purchaser are associated , the purchaser becomes liable for RLWT and is known as the “Withholding Agent”.
There is a difference in treatment of Paying Agent & Withholding Agent in relation to penalties and liability in the sense that Paying Agents are generally not liable for the RLWT if they have not retained the RLWT from the settlement funds because the RLWT agent would not be able to recoup the debt from the vendor. However a Paying Agent may be liable for shortfall penalties depending on the level of their culpability. When the purchaser and the vendor are associated persons the purchaser can be liable for the underlying RLWT.
Amount of RLWT to be withheld
The amount of RLWT that needs to be withheld will be the lowest of:
i) 33% (or 28% if the vendor is a company) x (current purchase price – vendor’s acquisition cost);
ii) 10% x the current purchase price; and
iii) Current purchase price – outstanding local authority rates – security discharge amount
As a general rule, RLWT must be paid before any disbursements are made at the time of settlement. In certain circumstances, the amount of RLWT is reduced to the extent required to discharge the vendor’s mortgage obligation held with a NZ registered Bank or Finance Institution licensed under the Non-Bank Deposit Takers Act.
As RLWT is not a final withholding tax, the vendor is able to claim a credit for the RLWT withheld against the final income tax liability in relation to the property disposal. The legislation also provides that the RLWT credit can be applied to satisfy the person’s other income tax liabilities, to the extent that the amount of RLWT paid exceeds income tax liability in relation to the disposal of the residential property. The vendor will have a choice to claim the credit in the end of year tax return or will be able to file an interim return, provided that the vendor has no outstanding tax obligations.
2. FOREIGN TRUST REVIEW
As a result of the Panama Papers there was great concern that NZ’s “Good Country” reputation was adversely affected. Consequently the NZ government commissioned a review of the NZ Foreign Trust Regime. The review of the NZ Foreign Trust Regime concluded that there was little evidence that NZ’s reputation was adversely affected by Panama Papers. In effect only 200 Trusts had a link to NZ. The review further revealed that the Foreign Trusts are legitimate vehicles and that the NZ tax treatment of foreign trusts is appropriate.
The review however highlighted that the disclosure and regulation should be improved. Suggestions included:
• Establishment of a Foreign Trusts Register that can be searched by Government Bodies.
• Filing of annual return, financial statements and details of distributions with the IRD
• Detailed disclosure in relation to settlors, beneficiaries, trustees, protectors and any persons exercising control over the Trust
• Application of Anti-money Laundering (AML) laws to accountants and lawyers , where they will have to comply with the due diligence and reporting requirements when they establish and/ or administer NZ Foreign Trusts.
NZ has signed up to a Global Automatic Exchange of Information Agreement which will be effective 01 July 2017. Common Reporting Standard (CRS) is an international reporting framework. It will serve as the collecting mechanism that will promote and facilitate Global Exchange of Information between the countries.
The reporting under CRS is likely to follow the reporting under FATCA, where the relevant information will be provided to the IRD, who will then exchange information with other jurisdictions.
Most trusts will be subject to reporting under CRS. The domestic legislation around CRS is currently being drafted and it is likely to be introduced in a bill later this year. Whilst we will provide you with an update in due course, If you establish, or administer foreign trusts you should start considering the impact of AML and CRS.
3. EMPLOYEE SHARE SCHEMES
Last month an Officials issue paper was released which seeks feedback on a proposal that will significantly change the way employee share schemes are taxed.
In simple terms the issue paper proposes that shares or options granted pursuant to an employee share scheme should be taxed at the time the shares or options are granted unconditionally, i.e. being taxed at the time of exercise as opposed to time of vesting. This proposed change in taxation will have an adverse impact in cases where employee share trusts are used, which currently facilitate capital gains to be delivered to the employees free of tax. Under the proposed rules the taxing point will be the time the shares are transferred to the employee as opposed to the time the shares are transferred to the employee share trust.
The consequence of the proposal is that any increase in value between vesting and exercise will be subject to tax. There should be no change in taxation where unconditional share schemes are involved. However the conditional share schemes (schemes that are subject to meeting substantial future conditions i.e. performance criteria) should be taxed at the time the conditions are met. On the other hand the expiry of a restrictive period will not be considered a substantial condition and the taxing point will not be deferred until the expiry of the restrictive period.
It is the officials view that the increase in value should be taxed as employee remuneration. The issue paper however fails to recognize that the increase or decrease in the value is a capital gain or loss which is beyond the control of the employee or the employer. The proposed taxation is an introduction of yet another “targeted capital gains tax.” If the officials wish to tax the increase in value of the shares perhaps consideration should also be given to a reduction of the capital gain that will be taxable as is done by some of our trading partners (i.e. Australia taxes only 50% of the capital gain, UK and USA tax capital gains at reduced tax rates). In effect most OECD countries make a distinction between capital gains and revenue gains and tax capital gains at either reduced rates or provide reduction to the proportion of the capital gain that is taxable.
The issue paper also considers whether a deferral concession should be granted in respect of shares or options granted by start-up companies to its employees, deferring the taxing point to the date the shares are either sold by the employee or the day the shares are listed on the open market. Once again this is a bad result as this option proposes to tax the full capital gain as if it was income.
Further proposals include the possibility of notional deduction for the cost of the shares to the employer at the time the income is taxable to the employee.
The corporate tax rate in Australia will be reduced for small businesses from the 30% rate to 27.5% effective 01 July 2016. Whether or not you will be eligible for this rate depends on the turnover of the business. The small business threshold turnover is set at $ 10 Mil for 2017, increasing to $ 25 Mil in 2018 and progressively increasing until it reaches $ 1 bn in 2023.
Should you have any questions on the content of this newsletter, please do not hesitate to contact us. We will gladly provide clarification or assistance as the case may be.