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Tax changes for settlements

Tax changes for settlements and the proposed “bright-line” test

With effect from 1 October 2015, there are new requirements around disclosure of tax information when buying, selling and transferring New Zealand property. There is also a new proposed “bright-line” test that will apply solely to residential land transactions to clarify and supplement the existing laws around taxation of property transactions.

The disclosure changes (which do not apply when the party is dealing with their “main home”) require parties to a property transaction to provide their IRD numbers, and where applicable, their taxpayer identification number from any overseas countries where they have to pay tax on their worldwide income.

Where a Trust is dealing with property, the IRD number to be supplied must be the IRD number for the Trust itself – not the trustees’ personal IRD numbers.

One effect is that entities involved in property transactions (other than in some specific exempt transactions, for example where the property sold satisfies the requirements of the “main home” exemption) will need an IRD number to complete the transaction. It is therefore advisable to consider the time it may take for you to obtain an IRD number when agreeing to timeframes in any property transaction.

Tying into the new disclosure requirements is the proposed bright-line test that will apply to residential property transactions entered into on or after 1 October 2015. This proposed test (which has not as yet been enacted and may be subject to changes before being passed) is intended to complement our current property tax rules.

The bright-line test is expected to require income tax to be paid on any gains made from the sale of residential property within two years of purchase. The
current proposed exceptions are if the transaction relates to the “main home”, to a relationship property transfer, or to inherited property.

Under existing law, gains from the sale of
land can already be taxed as income if that land was acquired for the purpose or intention of disposing of the land. This law remains unchanged, but has proved problematic for the IRD to implement as the IRD cannot always prove intention on the part of the taxpayer. The proposed bright-line test was introduced in part to resolve this problem for the IRD.

As the bright-line test is only intended to apply to residential land, there is also an associated definition of residential land. Residential land means land that has a dwelling on it, or for which there is an arrangement to build a dwelling, or bare land that is capable of having a dwelling on it due to its area and nature.

If you are involved in or anticipating entering into a property transaction in the near future it is important that you make sure you can comply with these new disclosure requirements and have considered the bright-line test and its potential effect.

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Monday, November 9, 2015

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