Changes to property investment rules
Many of you will be aware of recent legislative changes intended to tighten the property investment rules announced in the 2015 Budget.
Two of these changes are the new ‘bright-line test’ and ‘residential land withholding tax’ (RLWT).
These are very technical areas and a full explanation is beyond the scope of a short article such as this. However, it is worth highlighting some key points.
The bright-line test requires income tax to be paid on gains from residential property disposed of within two years of acquisition (subject to some exceptions). The test came into force on 1 October 2015. It does not apply to a person’s main home.
Essentially, the bright-line test supplements the existing ‘intention test’ in the current land sales rules. The intention test provides that gains from the sale of land are taxable when that land is bought with an intention or purpose of resale. But the intention test has always been difficult to enforce. It is often very subjective. On the other hand, the bright-line test is objective and easy to enforce. The bright-line test does not apply to property acquired through an inheritance.
The new residential land withholding tax (RLWT) is a tax on sales of property made by “offshore RLWT persons” within two years of acquisition. It is a collection mechanism for the bright-line test.
For the tax to apply, the land sold must be residential land. It must be sold within two years of acquisition, and the vendor must be an “offshore RLWT person”.
This last component requires vigilance – what is an “offshore RLWT person”? The definition includes New Zealand citizens who have been overseas for at least three years immediately prior to the date of disposal of the land.
However, it also includes New Zealand-based Trusts where there are “significant offshore interests”.
There are numerous ways in which a Family Trust might fall into this classification. For example, if one of the beneficiaries of the Trust has been overseas for several years and received a distribution (of more than $5,000 in any one year) from the Trust in recent times, then the Trust may fall within the statutory criteria of being an offshore RLWT person. Another example is where more than 25% of the trustees of the Family Trust are themselves offshore persons.
If you or your Family Trust sell residential property within two years of acquisition, it is most important that the definition of “offshore RLWT person” be considered, if you wish to avoid an unexpected income tax liability!
These are complex legal areas but Perpetual Guardian team members are trained to recognise the flags when they appear. In an increasingly complex world, it is essential that you receive up-to-date, professional advice to assist you with all your affairs.
Changes to Trust legislation
On 10 November, Justice Minister, Amy Adams, released draft legislation which will update the current 60-year old Trust law and aid in Trust administration.
The draft bill places more responsibility on trustees, with clear and mandatory trustee duties. Perpetual Guardian welcomes any changes which make the law clearer to understand and we will be submitting our feedback on the draft law.