PKF Francis Aickin Limited, Far North, New Zealand
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15 Oct 2015
The common misconception about the new land transaction rules is that they only apply if a property is purchased and sold within two years. This is not the case. The new rules are in fact two distinct separate sets of rules - the property conveyance rules and the 2-year bright-line rules.
Property Conveyance Rules.
These rules came into effect on 1 October 2015 and apply to all contracts entered into from that date. They do not apply to any contract entered into before then, as long as the transfer is registered on or before 1 April 2016.
Except for specific exemptions, all vendors (transferors) and purchasers (transferees) of land must provide an IRD number.
For non residents ("offshore persons") this also includes their tax file number (TIN) from their country of residence. To get a NZ IRD number the offshore person must have a NZ bank account. No bank account - no IRD number. No IRD number - no conveyance of title.
The principal exemption is for the main home of a NZ resident individual. A NZ resident individual is defined as a NZ citizen or permanent visa holder currently in NZ; or though not in NZ at present, have been absent for less than 3 years.
Where more than one home is owned, the "main home" is the one the individual has the greatest connection with. Thus the exemption does not extend to holiday homes, rental properties or bachs.
Many homes in NZ are owned by a family trust whose only purpose is to own the family home. As trusts are not "individuals", and therefore not eligble for the "main home" exemption, they will require an IRD number to enable any conveyance of title (whether a purchase, sale or transfer to a beneficiary).
To catch persons with a regular pattern of selling property, the main home exemption is not available where an individual sells their 3rd home within 2 years.
There are other specific exemptions including sale by an estate and mortgagee sales from the vendor's side only. Note that relationship property transfers are not automatically exempt; they need to meet the main home exemption.
As part of the documentation for all property transactions, a Land Transfer Tax Statement must be completed. If an exemption exists, the form is still partially completed, signed certifying details as true and correct, and sent to LINZ who then supply the data to IRD.
2- year Bright-line Rules
This concept was originally introduced in the 2015 budget. The intention is to assist with enforcement of the IRD rule of the profit on property purchased with the intent of resale,as already covered in tax law, being taxable. The Auckland property boom resulted in more short term property speculation and a less subjective rule was required.
Basically, a disposal of residential property within 2 years of acquisition will be taxable, unless an exemption applies.
Note that these Bright-Line Rules do not apply to commercial property.
The dates of acquisition and disposal are of vital importance when applying the test. The IRD has set the determination of the dates of acquisition and disposal by different methods which can result in a squeezing of the two year period. Acquisition is the date title transfer is registered (which may be months after the contract is signed.) Disposal is the date the contract is signed.
The proposed rules only apply to sale and purchase agreements entered into after 1 October 2015.
The bright-line test will not apply to the main home. There can only be one main home at a time. The exemption is also available to a trust so long as the beneficiaries occupy the home. (This differs to the conveyancing rules.)
Even if the bright-line test is passed, there are still the existing tax rules which may treat the property transaction as taxable. These are a minefield and include acquisition with intention of resale at a profit, relationship to a dealer, developer or builder and profits as the result of rezoning.
When dealing with property, the numbers tend to be quite large, therefore it is wise to get advise from your tax consultant to ensure you are not exposed to unexpected tax.
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