2 October Residential land withholding tax C/- Deputy Commissioner, Policy and Strategy Inland Revenue Department PO Box 2198 Wellington 6140

Transcription

1 2 October 2015 Residential land withholding tax C/- Deputy Commissioner, Policy and Strategy Inland Revenue Department PO Box 2198 Wellington 6140 Dear David Residential land withholding tax Thank you for the opportunity to comment on this Issues Paper. In our view, the proposal to introduce a residential land withholding tax (RLWT) should not proceed primarily because the costs imposed on buyers and sellers of residential property will far outweigh the revenue that will be raised. Cost / benefit analysis Paragraph 23 of the Regulatory Impact Statement to the Taxation (Bright-line Test for Residential Land) Bill (RIS) states that the bright-line rule is expected to raise an additional $5 million per annum. Only a portion of this will come from residential land sales by offshore persons. On a conservative estimate of 20%, this would equate to $1 million in additional tax revenue from RLWT. On the cost side of the ledger, the RLWT proposals will require the conveyancing agent for every residential land transaction to determine whether the vendor is an offshore person and whether the transaction is taxable under the bright-line rule. These determinations may not be straightforward (for example, in cases where the vendor is a non-individual, or if the property is held in a trust, or if the vendor s classification as an offshore person is hard to determine). Chartered Accountants Australia and New Zealand Level1, Carlaw Park, Nicholls Lane, Parnell, PO Box 3334, Shortland Street, Auckland 1140, New Zealand P charteredaccountantsanz.com Chartered Accountants Australia and New Zealand ABN (CA ANZ). Formed in Australia. Liability limited by a scheme approved under Professional Standards Legislation. Members of CA ANZ are not liable for the debts and liabilities of CA ANZ.

2 In some cases it will be difficult to verify the earlier consideration or price paid for the property; for example, Quotable Value or Land Information New Zealand records may be incorrect; the property may have previously been transferred between related parties or family members with no monetary consideration being paid (gifting); the property may be both residential and commercial; the conveyancing agent has not acted previously for the party and the vendor disputes the amount to be paid. According to Real Estate Institute of New Zealand records, 86,000 residential property sales occurred in the 12 months from September 2014 August At a conservative estimated average additional cost per transaction of $200 (for additional fees for time and cost of the conveyancing agent), the indicative additional compliance cost of the RLWT regime would be approximately $17 million (86,000 transactions x $200 additional costs). This is more than three times the total additional tax revenue expected to be raised from the bright-line rule. The difference will be much greater when compared to the estimated additional revenue from sales by offshore persons that are subject to the RLWT. At the estimate of $1 million the costs would exceed the revenue by 17 times. On a per transaction basis, the RLWT will raise less than $12 in average revenue ($1 million/86,000) at an average additional cost per transaction of $200. Also to be added to this cost are Inland Revenue s administration costs and systems implementation costs, which we do not expect will be insignificant. The implementation costs will be incurred again when Inland Revenue s Business Transformation project progresses and system changes are required. Other taxes have been repealed on the basis that the costs of administration and collection outweigh the amount of revenue collected; most recently, gift duty. When gift duty was repealed the costs of the regime to the private sector were said to be $70 million per year, and administrative costs to Inland Revenue were $430,000 per year; while the revenue collected was $1 million. One of the objectives of the bright-line rule is to minimise costs for taxpayers in complying with the bright-line test (refer to p 4 of the RIS). As the above analysis illustrates, the additional costs of an RLWT regime would clearly not meet this objective. For this reason alone we believe the RLWT proposal should not proceed. In our comments below we highlight further reasons for not proceeding with the proposal.

3 National implications Another aspect to consider is that the suite of property changes appears to be driven largely by the current Auckland property market. Caution should be exercised in designing new rules to address a local issue that may be inconsistent with the current tax rules and will impose significant additional costs on residential land transactions across the country. Other collection tools Paragraphs 2.5 and 2.15 of the Issues Paper justify the introduction of an RLWT on the basis that the Commissioner s current tools for collecting tax from foreign investors with no physical presence in New Zealand are inadequate. While we acknowledge that there is some merit in this argument, we do not consider this reason to be sufficient to justify the introduction of an RLWT given the additional costs that it would impose. The means available to the Commissioner to collect tax from foreign investors are listed in paragraph 2.7 of the Issues Paper. These include the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters, double tax agreements and tax information exchange agreements. The Issues Paper describes these as a backstop rather than the primary tool. Nonetheless, these tools are helpful to the Commissioner and there is no evidence that they are ineffective. In our view, the additional information that will be available to the Commissioner via the new information requirements imposed under Phase 1 of the Budget 2015 announcements (enactment of the Land Transfer Amendment Act 2015 and Tax Administration Amendment Act 2015) will bolster significantly the Commissioner s current ability to collect tax from not only the bright-line rule but also the other land taxing rules, including the intention test. Deferral If our submission that the RLWT should not proceed is not accepted, we believe, at the very least, the introduction of an RLWT should be deferred until the effect of the new information requirements and the bright-line rule on enforcement/collection have been assessed. This review should be conducted after the information collection and bright-line rules have been in operation for a reasonable period of time.

4 Taking stock If the RLWT proposal is to proceed, it is critical that a full review is undertaken of the three stages of the reforms before the RLWT is implemented. Certainty, fairness and compliance with the new property rules will be enhanced if the three sets of rules are coherent. This stock taking review should be undertaken by the FEC at the time of the introduction of an RLWT Bill. In the absence of such a review there is a high risk that the overall package of reforms will lack the coherence that it requires and will not provide taxpayers with an appropriate degree of certainty. Design If, notwithstanding our views expressed above, the proposals proceed we set out in the attached appendix our submissions on specific aspects of the proposed RLWT regime that we believe need to be addressed. We are happy to discuss our submission with you. Yours sincerely Peter Vial Tax New Zealand Leader Tel: (09) E: Peter.vial@charteredaccountantsanz.com

5 Appendix: Submissions on design of RLWT Chapters 1 and 2 Introduction and background The summary on page 3 of the Issues Paper notes that the RLWT is intended to be a mechanism for supporting the collection of tax imposed under the bright-line test. Paragraph 2.2 of the Issues Paper confirms that the purpose of the bright-line test is to supplement the intention test [section CB 6] in the current land sale rules with an objective test. On the basis of these and other public statements we have assumed that the RLWT will not apply to income made by an offshore person who is subject to tax under other provisions in the land taxing rules (e.g. because they are in the business of building or developing or dealing in land). If our assumption is incorrect and the RLWT is to apply to any income derived under subpart CB by an offshore person and not just to income taxable under proposed section CB 6A (the bright-line test ), we believe that this should have been made more explicit in the Issues Paper and other documentation. If the Government s policy intent is that all income derived by an offshore person under subpart CB is to be subject to RLWT, RLWT exemption certificates should be available for New Zealand residents taxable under the land taxing provisions, whose main business is buying and selling, building, developing or subdividing land, even if they are offshore persons. These taxpayers are required to pay tax on the gain on the disposal of land under the other provisions in subpart CB, regardless of the existence or otherwise of the bright-line test.

6 Chapter 3 - Who should have the withholding obligation? We agree that a conveyancing agent involved in the property transaction should be the RLWT conveyancing agent for the reasons set out at paragraph 3.4 of the Issues Paper i.e. the conveyancing agent already has professional obligations in respect of the conveyance and the systems and trust accounts needed to manage the funds on settlement of the transaction. In our view the withholding agent for RLWT should be the vendor s conveyancing agent (except in the rare situation where the vendor is not using a conveyancing agent, in which case it should be the purchaser s conveyancing agent). We believe that the vendor s conveyancing agent is in a much better position than the purchaser s conveyancing agent to meet the RLWT withholding agent obligations, and particularly to confirm whether the vendor is eligible for an exception from withholding and to obtain the vendor s acquisition price. Imposing these obligations on the purchaser s conveyancing agent would increase compliance costs and create additional risk of noncompliance. We acknowledge that there are some advantages in imposing the primary obligation on the purchaser s conveyancing agent (including that that person has the least to gain from failing to comply with the rules and that the funds will flow through their trust account first) but we do not think those advantages outweigh the disadvantages. The purchaser s conveyancing agent is not in nearly as good a position as the vendor s conveyancing agent to determine whether the vendor is an offshore person or has sold the property within the bright-line period, even if the purchaser s conveyancing agent is able to rely on information supplied by the vendor s conveyancing agent or available from Quotable Value and Landonline. Furthermore, given that the ultimate tax liability belongs to the vendor, we believe it is unfair to impose the withholding compliance costs on the purchaser. Although the purchaser s conveyancing agent obtains the funds first, these funds are the purchaser s funds and do not become the vendor s funds until passed to the vendor or the vendor s conveyancing agent. The vendor s conveyancing agent has specific responsibilities and instructions to disburse the settlement funds for the vendor including to discharge securities over the property by repaying loans and to pay the expenses on the sale including any real estate agent commissions or fees. In practice the vendor s conveyancing agent should be able to calculate any withholding tax obligations at the same time as they meet their other obligations on settlement.

7 We acknowledge that, under other withholding tax regimes both in New Zealand and internationally, it is generally the payer of an amount who is required to withhold the tax and pay it to the Revenue Authority. In most cases, this is at a flat percentage of a gross amount of passive income a calculation which is easier to perform than that under the current proposals. The Issues Paper raises a concern that there is no back stop if the vendor s conveyancing agent is the withholding agent. It is highly unlikely that a vendor s conveyancing agent would not gather appropriate information or have systems in place to determine whether a client has an RLWT obligation. The vendor s conveyancing agent will be regulated by a professional body and subject to professional disciplinary procedures for breaches of their obligations. Furthermore, we consider a back stop is unnecessary for a tax that will raise a very small amount of revenue. If, contrary to our recommendation, it is decided that the purchaser s conveyancing agent is to bear the primary obligation to withhold RLWT, the RLWT must be at the flat default rate of 10 per cent. The purchaser s conveyancing agent should be entitled to rely on a simple declaration made by the vendor s solicitor as to whether the RLWT is or is not to be deducted (i.e. whether the vendor is an offshore person and, if so, whether the bright-line test applies). We agree with the suggestion at paragraph 3.30 that the primary withholding obligation should fall on the purchaser where there is no conveyancing agent.

8 Chapter 4 The rate of RLWT We submit that, where the withholding agent is the vendor s conveyancing agent, which is our strong preference, the amount to be withheld should be the lower of the: standard rate of 33% of the vendor s gain on that property; and default rate of 10% of the total purchase price of that property. If the purchaser s conveyancing agent is to be the withholding agent the amount of withholding should be at the default rate 10% of the total purchase price of the property. If it is determined that the purchaser s conveyancing agent should bear the primary withholding obligation, the purchaser s conveyancing agent should not be required to ascertain the vendor s gain on sale and apply the 33% rate. That said, consideration should be given to the feasibility of setting the RLWT rate at the vendor s marginal tax rate, particularly in the case of companies. The 33% standard RLWT rate is too high for companies, which have a 28% marginal tax rate. Furthermore, instinctively, a corporate offshore person is more likely to have incurred material deductible expenditure (or in some cases to have access to tax losses from other members of its group of companies) and is therefore more likely to be in a final tax refund position. Setting the standard RLWT rate at 28% (or the prevailing company tax rate ) for companies would reduce the potential for over taxation and be fairer. Other deductions We submit that the accuracy of the RLWT collected will be significantly improved by allowing the vendor to deduct their direct costs of sale in calculating their net gain on the property for RLWT purposes. All direct expenditure including real estate agent s costs (commissions, fees and marketing/ advertising costs) and legal fees and registration costs incurred in relation to the sale should be included in calculating the vendor s gain. The vendor s conveyancing agent will know the quantum of real estate commissions, fees and costs and legal fees and costs as they have to pay them at or before settlement and record them in the settlement statement they prepare. Allowing for the deduction of this expenditure in the RLWT calculation will reduce the need for vendors to file interim tax returns in order to claim deductions for such expenditure. This will reduce both compliance and administration costs. In relation to these direct sale costs, we do not accept the argument at paragraph 4.9 that complex and technical issues can arise in determining whether a deduction is allowed. If the legislation specifies that real estate commissions, fees and costs and legal fees and costs are deductible, conveyancing agents will not suffer considerable compliance costs in determining deductible expenditure. Given that the conveyancing agent generally pays the commissions and fees to the real estate agent and charges and recovers the legal fees and

9 costs, the compliance costs of performing the calculation should be minimal and the conveyancing agent should be able to rely on the amounts as being real and genuine. The default RLWT rate Ten percent of the purchase price is an arbitrary rate. Despite the absence of evidence as to how closely it will approximate the vendor s expected final tax liability, instinctively it feels about right. We are not in favour of a higher default rate. For an individual on the highest marginal tax rate the 10 per cent rate equates to a 30 per cent gain on sale. If there is a material shift in the property market and / or evidence of actual tax liabilities being significantly different to 10 percent, the default rate should be reviewed.

10 Chapter 5 - Fulfilling RLWT obligations A conveyancing agent will be required to withhold and pay the required amount to the Commissioner unless one of the following circumstances applies: 1. The vendor is not an offshore person. 2. The sale of the property would not be taxable for the vendor under the proposed bright-line test because: a. the vendor acquired the property being sold before 1 October 2015; or b. the vendor acquired the property being sold after 1 October 2015, but the vendor has owned the property for two or more years. The determination of the vendor s withholding obligation relies on information being gathered and a determination being made by the vendor s conveyancing agent. The purchaser and their conveyancing agent are not in a position to ascertain this information easily and must rely on information provided by the vendor normally via the vendor s conveyancing agent. As discussed above, we are strongly in favour of the vendor s conveyancing agent bearing this obligation. The bright-line test provides an exclusion for a main home. The Issues Paper is silent on the application of this exclusion in relation to RLWT. It is conceivable that this exclusion could apply in the case of offshore persons. If it does apply then any gain will not be taxable under the bright-line test and should not be subject to RLWT. The proposed rules should allow for this exception as well as the exceptions for vendors who are not offshore persons and sales outside the bright-line period. Not an offshore person Determining who is not an offshore person will add compliance costs to all residential conveyancing transactions. The conveyancing agent will need to obtain a declaration from every client who sells property as to whether or not they are an offshore person and whether the bright-line test applies. Individuals For individuals the definition of offshore person was introduced into the Tax Administration Act 1994 as part of the recent changes made by the Land Transfer Amendment Act 2015 and Tax Administration Amendment Act The definition is based on citizenship and immigration status and on presence in the country and is not likely to be widely understood. Inland Revenue should publicise the definition widely and provide examples.

11 Non-individuals We submit that the offshore ownership thresholds proposed to be used to determine whether a non-individual is an offshore person are far too low. The 25% or more test for body corporates, partnerships, trusts and unit trusts should be increased to a greater than 50% test, which equates to control by offshore persons. In our view, the RLWT should not apply where income from the sale of residential land is derived by companies or limited partnerships via fixed establishments in New Zealand, as defined in section YA 1 of the Act or where sections HD 18 to HD 25 already require agents to return tax on income derived by absentees. In these circumstances the foreign investor has a physical presence in New Zealand (or the agent is required to return tax on the income), which obviates the need for a non-final withholding tax to improve the collection of revenue (paragraph 2.15). In the case of trusts, the test for determining whether a trust is an offshore person could be based on the location of the trustees. If a trust has no New Zealand based trustees the trust could be treated as an offshore person. If a trust has a New Zealand trustee that trustee is liable for the trust s tax obligations. We also submit that whether an offshore person has a beneficial interest or entitlement to 25 per cent or more of the trust property should not be used to determine whether a discretionary trust is an offshore person. Beneficiaries of discretionary trusts only have the right to be considered for distributions and do not have a beneficial interest or entitlement to a percentage of the trust property. Two year period in bright-line test exceeded As you know, we do not support a date of acquisition for the bright-line test generally being the vendor s date of registration of land title, as this date is inconsistent with the approach applied to the other provisions in subpart CB. Paragraph 5.17 notes that RLWT should still apply where a sale is caught by both the intention test and the bright-line test. The bright-line test is intended to buttress the intention test. This suggests to us that, if a transaction is taxed under the intention test, it should not also be taxable under the bright-line test and in such a case RLWT should not be imposed. Paragraph 5.18 proposes that the RLWT should apply to residential land as defined for the purposes of the bright-line test. As you know, we have recommended that the definition of residential land be amended to include bare land that is zoned residential rather than bare land that because of its area and nature is capable of having a dwelling erected on it. When does the withholding obligation arise? We agree that the obligation to withhold should arise on the day the contract is settled and not at the time any deposit is paid prior to settlement.

12 We agree that penalties should be in line with the current penalties in the Tax Administration Act 1994 for failure to withhold tax. Discharge of other obligations upon settlement Elevating the priority of RLWT so that it ranks above amounts owed to secured creditors such as banks is likely to increase the cost of capital. We note also that no policy rationale is provided for RLWT not having the same ranking as income tax. We submit that RLWT should not rank above any other disbursements when the vendor s conveyancing agent is the withholding agent, as the standard rate for RLWT will be used in most cases. In a falling market, by using the standard rate as illustrated in the example on page 23 of the Issues Paper, there will be no RLWT payable. In a rising market, as illustrated in the second example on page 23, use of the standard rate is generally likely to produce sufficient funds to meet the RLWT and other commitments. Where the standard rate for RLWT is used it is hard to envisage circumstances in which there will be a need for the RLWT to rank above other disbursements. In most cases use of the default rate to calculate the RLWT will lead to over taxation. If the RLWT is given priority over other disbursements such as secured amounts the sale is unlikely to be completed. This is because secured creditors will not release their security unless they are paid in full and would insist on payment before any tax is withheld on the transaction, especially where the amount withheld is in excess of any tax payable or no tax is payable once a return is filed. If there are further concerns the general anti-avoidance rule should give Inland Revenue sufficient tools to combat any mischief. Payment of withheld amounts to the Commissioner We recommend that both batching and payment on a transaction by transaction basis be allowed. We agree that a delay in the payment of RLWT should not delay the title registration process. No registration of title As noted above, we agree that, in the rare circumstances where neither party has a conveyancing agent the primary withholding obligation should fall on the purchaser. In this circumstance we submit that the default withholding rate of 10% should apply.

13 Chapter 6 - Information requirements As noted at paragraph 6.2 the first exception is available when a vendor is not an offshore person, which requires proof of presence in New Zealand in the requisite period. As noted above and in our earlier submissions on the bright-line test proposals and Bill, we do not support a different date of acquisition than the standard date used in subpart CB. If our submissions are accepted and the date of acquisition is the date that the first interest in land is acquired, as specified in section CB 15B, the vendor s conveyancing agent should sight a copy of the earlier agreement for sale and purchase (i.e. the vendor s purchase contract), which will evidence that date of acquisition. Often the conveyancing agent will have acted for the vendor on their purchase of the property and will already hold a copy of that agreement. If the default position is that the RLWT withholding agent is the vendor s conveyancing agent, as we have suggested, or if the purchaser s agent can only deduct at the 10 percent rate there will be no need for the purchaser s conveyancing agent to incur cost and inconvenience in obtaining the vendor s acquisition price. As noted above in our submissions on chapter 4, the vendor s conveyancing agent will know not only the cost of the property but also the real estate commissions, fees and costs and the legal costs and should therefore be able to deduct all of these direct costs in determining the vendor s net gain. If the client does not provide the appropriate information, they can always apply the RLWT at the default rate. We agree that the conveyancing agent should be entitled to rely on a statement provided by the vendor unless they know it to be false. Inland Revenue should collect information on both the RLWT collected and RLWT refunded following the filing of interim or final income tax returns. This information will be of value in assessing the fiscal effect and effectiveness of the tax.

14 Chapter 7 - Tax credits and filing a tax return We agree that the RLWT should not be a final tax and that a taxpayer should be able to file an interim income tax return in order to obtain an RLWT refund or to use the RLWT as a credit against other tax obligations or to calculate any additional tax payable. As you know, we have submitted that losses incurred under the bright-line test should not be ring-fenced. We believe that the standard rate RLWT rate will be used for the majority of cases when the withholding agent is the vendor s conveyancing agent. This will reduce the need for interim returns and, if direct costs of sale can be included in determining the gain that is subject to the RLWT, the need will be reduced even further.