The Government plans to tax offshore people on the profit they make from selling a New Zealand house if it is sold within 2 years after it was bought. A Parliamentary Bill is now being considered by Select Committee. It is probably aimed at discouraging the kind of speculative property trading by overseas property buyers which has been blamed for helping to push Kiwi house prices through the roof.
This new law has not been passed yet, but it has been expected for a while. In October 2015 new Land Information rules required everybody buying or selling a property to provide tax details, unless it is the sale or purchase of their “main home”. In particular, people with tax resident status in other countries are now required to provide their tax number for each country. Now that this information is being collected as a matter of course, it will be possible to chase down those who later sell their houses and who will be liable for the new tax when it comes in.
It is possible that the new law will be passed before the end of the year. The Government has been under pressure lately both to “do something” about the housing bubble, and to keep track of just how many foreign buyers are snapping up New Zealand houses.
Who Pays?
The new tax will be payable by any “offshore person”. This includes anyone who is not a New Zealand Citizen or Resident. That is, anyone on a Visitor, Student or Work Visa, or who is not in New Zealand at all, must pay withholding tax when they sell a property within 2 years after they bought it. Furthermore, it will also apply to:
- Residents who have been out of New Zealand for more than 12 months; and
- Citizens who have lived outside New Zealand for more than 3 years.
A company will be taxed if it is not NZ-registered or any of its Directors has on offshore address; or more than 25% of its Shareholders are offshore. A lot of companies have offshore stakeholders, so that this will have far-reaching effects. Properties held by Trusts will also be taxed on sale if – basically – it has any connection with offshore persons – even to the extent that, if the Trust has distributed assets to an overseas beneficiary in the last 6 years, it will be treated as an “offshore Trust”.
How Much Tax?
The tax to be paid on the sale will be the smaller amount of:
- 33% of the profit earned from the sale (or 28% if the vendor is a company); or
- 10% of the entire purchase price.
For instance, if someone from overseas bought a house in 2015 for $500,000 and sells it now for $600,000, their profit is $100,000. If they are an individual, they must pay $33,333 in Residential Land Withholding Tax (RLWT). In another example, if they bought a house in 2015 for $2 million and sell it now for $3 million, then they pay $300,000 (10% of the price) and not $333,333 (33% of the profit on sale).
There is an exception that if there is not enough money left over to pay the tax after a mortgage has been repaid, then the tax is reduced to the amount which is left.
Effect on Visa Holders
Anyone living in New Zealand on a temporary visa needs to consider their choices carefully even before they buy a house. For example, if they are forced to leave New Zealand because of (say) loss of their job here, then they could also be hit with a major tax burden when they try to cash up.
Investor 1 and 2 Resident Visa holders beware. Although you only need to be in New Zealand for a certain number of days each year in order to keep your Resident Visas, those minimal numbers of days will probably not be enough to avoid being classed an “offshore person” by IRD
Entrepreneur Work Visa holders could face similar problems even after they get Residence. We see some business people who are setting up here, spending considerable time travelling back and forth both before and after they finally get Residence. They will need to keep track of their “time in New Zealand” records, so that they are aware of the risk of being hit with this tax if they sell up their house.
Remember, this tax is only applied to people who sell a house within 2 years after they buy it. Those who buy to hold the property for the long term are not the target here. Rather, it is those who want to make a quick buck on the back of climbing house values who need to do their sums carefully.