Option Meets objective? Impacts Net impact Fiscal Economic Administrative Compliance Fairness Option 1: status quo Does not optimise effectiveness or support the integrity of the bright-line test. N/A be perceived as inaction and increase non-compliance with New Zealand’s tax rules more generally. Would require the use of Inland Revenue resources to identify and investigate This option does not impose additional compliance costs beyond those already experienced. Could be perceived as being unfair, if there is a view that foreign investors are not paying “their fair share of tax”. Perception of unfairness could undermine the integrity of the New Zealand tax system. Does not impose additional compliance costs, but does not increase the effectiveness of the bright-line test and will require the use of Inland Revenue to investigate Not recommended Option 2: status quo + additional information campaigns May partially meet objective as it could increase the effectiveness or support the integrity of the bright-line test in some situations. However, the effectiveness of the bright-line test would not be optimised. N/A Could be perceived as inaction and increase with New Zealand’s tax rules more generally. increase administrative costs as it will require the use of additional Inland Revenue resources to engage in information campaigns. Audit resources still required to investigate Compliance may be greater than under option 1, depending on whether third parties would be required to provide information to residential property buyers and sellers about their tax obligations. Could be perceived as being unfair, if there is a view that foreign investors are not paying “their fair share of tax”. Increases administrative costs without guaranteeing an increase in compliance. Perception of unfairness could undermine the integrity of the New Zealand tax system. Not recommended compliance.
Option 3: status quo + review in three to four years Does not optimise the effectiveness or support the integrity of the bright-line test. N/A Could be perceived as inaction and increase with New Zealand’s tax rules. Could increase administrative costs as it will require the use of Inland Revenue resources to conduct a full review and would still require use of Inland Revenue resources to investigate Compliance costs are likely to be the same as option 1. Could be perceived as being unfair, if there is a view that foreign investors are not paying “their fair share of tax”. Perception of unfairness undermine the integrity of the New Zealand tax system. Perception of inaction could encourage further non-compliance. Not recommended Option 4(a): withholding tax on of residential property made within bright-line period by offshore persons Meets objective. The bright-line test is estimated to raise an additional $5 million per annum. As option 4 has been designed as a collection mechanism for the bright-line test, it is expected that it would raise a portion of the $5 million estimated for the bright-line test. Would reduce instances of with the bright-line test. Could prevent some property transactions from being completed, due to, for example, cash-flow issues, or if some sellers would in absence of a withholding tax think that they could evade the bright-line test. Increases administrative costs because it requires the implementation of a new withholding tax type, but it could decrease required audit resources over the longer term. Increases compliance costs in determining whether withholding applies and undertaking the withholding. Could decrease compliance costs for some sellers, where the withholding is close to their income tax liability. be perceived as being fairer by New Zealand residents, if there is a view that foreign investors are not complying with their tax obligations. Increases compliance costs and administrative costs beyond the status quo, but this is offset by reduced administrative costs in other areas and would improve integrity in the tax system, as New Zealand-based taxpayers could perceive the measure as ensuring that foreign investors “pay their fair share of tax”. Recommended
be available to both buyer and seller, as well as their respective conveyancing agents thereby reducing compliance costs. taxpayer’s final income tax liability - particularly as the bright-line test (and thus the RLWT) is targeted at short-term speculation. Where the seller has made a loss on the sales price, RLWT would be withheld even though there is no tax liability. Would require more refunds to be issued. Recommendation: not recommended. 33% of seller’s gain sales price - seller’s acquisition price) The amount withheld would be more in with the taxpayer’s final income tax liability. Relatively simple to calculate - seller’s acquisition price generally available from Quotable Value. No RLWT to be withheld when the seller has made a loss on the sales price. There may be instances where the seller’s acquisition price is not available, in which case, 33% x seller’s gain becomes 33% x total sales price and there would be over-taxation. Over-taxation would also occur where the seller has a number of deductions available (for example, where the seller has made a number of capital improvements) Recommendation: not recommended. “Lower of” approach The amount withheld would be more in line with the taxpayer’s final income tax liability, but there is a back stop There would still be some instances of over-taxation where the seller has a number of deductions available.
NRWT). There is a “back stop”: if the buyer’s conveyancing agent fails to withhold correctly, a secondary liability can be placed on the seller’s conveyancing agent. Recommendation: not recommended. Seller’s conveyancing agent (e.g. solicitor or conveyancer) be seen as being fairer for buyers – the compliance burden and cost are legally borne by the seller (i.e. by the person with the ultimate tax liability). The seller’s conveyancing agent may have more immediate access to information about the seller’s offshore status. The seller’s conveyancing agent deals with other expenses at the time of settlement (e.g. mortgages and rates). Contrary to international and New Zealand’s current withholding taxes where the withholding liability on the payer. There is no “back stop” if the agent fails to withhold. Recommendation: recommended if a number of safeguards are introduced to protect the integrity of the withholding tax. When should the Commissioner be paid before other disbursements? In situations where the buyer’s conveyancing agent withholds RLWT, the amount withheld would be paid to Inland Revenue and the remaining funds would then be passed to
Certification Pure self-certification is not recommended in this instance, due to the funds potentially at stake – the two outcomes for RLWT are withholding and no withholding, while for the majority of other withholding taxes, the two outcomes both involve withholding, but at different rates. Pure self-certification could create an incentive to fraudulently self-certify as not an offshore person, thus reducing the effectiveness of the withholding tax. Options Advantages Disadvantages Pure From a compliance perspective, it is very simple. Could create an incentive to fraudulently self-certify as not an offshore person due to the funds at stake. This could substantially reduce the effectiveness of the withholding tax and thus the bright-line test. Recommendation: not recommended. Provision of information by seller and certification by conveyancing Could be very difficult or impractical to determine in relation to This would increase compliance costs substantially. Less likely for offshore person to be incorrectly classified. This enhance the effectiveness of the withholding tax and test. Recommendation: not recommended. Withholding agent must be satisfied that person is not offshore, with clear guidance on who is offshore and what information is acceptable Reduces compliance burden placed on withholding agents to determine whether a is an offshore person. The requirement that the person who Would still impose compliance costs on in order to be able to correctly state whether they are an offshore person.
In addition, we consider that Inland Revenue should be able to inform the relevant professional body of the withholding agent about a failure to withhold where the failure appears to be negligent or fraudulent. We also consider that the buyer should be held liable for the amount of RLWT that should have been withheld, if the buyer and seller are associated persons. Options Advantages Disadvantages Withholding agent is liable for amount that should have been withheld There is someone in New Zealand from whom Inland Revenue can collect the amount that should have been withheld and paid to Inland Revenue. The funds never belonged to the withholding agent – they are simply an intermediary. This may lead to increases in the cost of professional indemnity insurance, which could substantially increase the cost of conveyancing. Recommendation: not recommended. No further action Simple to administer. Provides certainty to withholding agent that they would not be held liable for the amount that should have been withheld, if they had no reason to not believe the seller’s statement. Aside from monetary penalties there will be no incentive for withholding agents to comply with withholding tax obligations. This would undermine the integrity of the withholding tax and the bright-line test, as well as the integrity of the tax system. Recommendation: not recommended. Referral to relevant professional body after failure to withhold due to negligence or fraudulence Similar to system in place for Landonline. Provides withholding agents with additional incentive to comply with Action taken by relevant professional may not deter repeat offenders and may not affect overseas solicitors. There may still be an incentive