Previously we noted the government’s proposed property taxation changes and ‘bright-line’ test. The legislation has now come into force and those changes are in effect; both parties to an Agreement for Sale and Purchase of Real Estate dated on or after 1 October 2015 need to be aware of their new obligations.
Why have there been changes?
The government’s intention behind the bright-line test was to introduce a capital gains tax on residential property bought and sold within a two-year period. The objective is to try to curb rising house prices, driven by large numbers of property investors in the market. Reserve Bank of New Zealand statistics show that investors have accounted for 33% of new residential mortgage lending in August, compared with first home buyers who made up just 10.5%.
The sale and purchase of property will be monitored through the parties supplying a tax statement that gives their tax details to the Inland Revenue. The tax statement will provide property details, the identity of the party and whether the party will be claiming an exemption to not supply their IRD number. Both vendors and purchasers need to make sure the information they are giving in the new tax statements is correct, as knowingly giving a false tax statement may result in a fine of up to $25,000 for a first offence.
The ‘main home’ exemption
In our Winter edition, we noted that one of the few exemptions of the need to provide tax details is if the property is the ‘main home’. The main home for tax purposes is considered to be the one dwelling that is mainly used as a residence by the person claiming the exemption, and with which the person has the greatest connection if they own more than one home.
If you are a New Zealand citizen and have been in the country within the previous three years, or you hold a New Zealand residency visa and have been in the country within the previous 12 months, you will be able to rely on the ‘main home’ exception. The exemption cannot be claimed by a company, an ‘offshore’ person, or someone who has already claimed the ‘main home’ category twice in the two years prior to the date of the third agreement to purchase property.
The effect on family trusts
It’s also clear that the ‘main home’ exception will not apply to family trusts. This means every trustee of the estimated 400,000 trusts in New Zealand needs to be aware that they will be required to provide an IRD number for the trust when entering into an agreement to transfer property.
A large number of New Zealand family trusts will own the family home but will not own any income earning assets, meaning the trust will not currently have an IRD number. In order to complete settlement of property transactions, trustees must apply for an IRD number – a process which may take up to three weeks. Forms to make an application are available online, with the applicant required to provide a copy of the trust deed along with tax details of each trustee. Inland Revenue will then issue the trust with its own IRD number which is entirely separate to that of the trustees.
To avoid delays in settlement, we recommend applying for an IRD number for your trust before you even start the buying or selling process. Your transfer cannot be registered without an IRD number, meaning that if you can’t supply the IRD number you will not be moving into your home on the day you planned, and you may also face hundreds of dollars in penalty interest.
If you need help to obtain an IRD number for your trust, or you have questions on how these changes may affect you, do get in contact with us as early in the process as possible.