Devil in property tax detail

Over the last year, a new residential property tax regime has come into force, expanding the existing rules around land sales in the process.

The new regime includes the bright line test, residential land withholding tax (RLWT) and associated information disclosure requirements.

In a presentation at the recent Chartered Accountants Tax Conference 2016, BDO tax associate Brett Spencer said the regime might appear straightforward, but there is more to it than meets the eye.

“The new rules are still being bedded down and not all of the practical issues associated with them have become apparent yet.”

This is partly because the legislative process introducing the regime was undertaken quickly and partly because of the policy rationale behind the regime.

Concerns over Auckland house prices and the role of non-resident buyers in relation to them was the real driver for the new rules, he said.

The haste to address this meant there were some practical issues with the regime from the start. These range from problems obtaining IRD numbers to the filling in of tax statements.

Co-presenter lawyer Matt Hay said the new regime added a level of complexity and risk to transactions already perceived as high risk.

Sophisticated property investors are likely to be aware of the new rules and should dispose of their purchases accordingly, he said.

“But there are many people likely to be caught out by the rules in accidental or unwitting situations.”

Spencer said a good example of this was if someone was transferring a property from themselves to a family trust.

“That movement from one entity to another is a situation where the bright line test will apply – and many people won’t realise this.”

Spencer and Hay’s presentation explored some of the issues in such “related parties transactions”, which might catch people unaware.

These included uncertainties over situations in which nominations occur, changes of title, resettlements, the definition of an “offshore person” and what that means when it comes to Trusts and companies.

These property tax issues are more complex than many understand – and even knowledgeable investors might need advice, Withers Tsang partner Mark Withers said.

“The problem is that many investors are do-it-yourself accountants and there are some tax things you can do yourself.

“But the land tax provisions are complicated. And if you are not up-to-date with the regulations and provisions it can be difficult to get the requirements right.”

In his view, the difference between sophisticated and less sophisticated investors is that sophisticated investors have an accountant while less sophisticated investors do not.

“Sometimes investors simply don’t know by themselves when to ask questions or when they have a problem. And that can end badly.”

Withers said that he sees situations where people have run into problems with property tax several times a week.