New residential property tax – what will it look like?

The new “bright-line” test to tax gains on residential properties sold inside two years of ownership has taken a more comprehensive shape now that the public consultation period is over and the relevant Bill has been sent to Parliament for approval.


Readers of previous items on this topic may be broadly familiar with the intended workings of new section CB 6A but we have summarised the essential features here as well as identifying a few fish-hooks for the unwary:


  • The new law will come into force on 1 October 2015. From this date all land registrations must be accompanied by a tax statement from both the vendor and the purchaser unless the transaction is a “non-notifiable” transfer because it is subject to one of several exceptions.


  • The main exception is property which was the “main home” for the vendor and which will be used for the same purpose by the purchaser. Where somebody has more than one home the “main home” will be the one they have the closest connection with.


  • If a vendor has already used the main home exception twice in the preceding two years, that exception cannot be used a third time – ie three strikes and you’re in.


  • There are also exclusions for properties which have been inherited or acquired as a result of relationship property agreements.


  • Details to be provided for notifiable transfers include an IRD number and confirmation of residency and citizenship status.  “Offshore persons” will include a NZ citizen who has been physically absent from the country for three years, resident class visa holders who have been absent for 12 months, and anyone else who is neither a citizen nor a resident.


  • Offshore persons will also include any non-individuals which are owned or controlled by the types of people identified above (the threshold to trigger this inclusion being set at 25% or more of beneficial interest).


  • All information declared as part of the new rule will be collected by conveyancers and provided to LINZ, which in turn will provide the information to IRD.


  • Trustees must provide tax information including IRD numbers for every transfer they are party to.  Notwithstanding that obligation trusts will be eligible to claim the “main home” exemption for the property which serves as the family home of a beneficiary or settlor of the trust.


  • As is common with other areas of tax law, nominees must provide details about any principal whose interests they represent.


  • It will be an offence to knowingly give false information when required to do so under the reforms. Having said that, however, there will not be any liability for any person who unintentionally provides incorrect information.


  • Losses from the two-year rule will be ring-fenced.  That means they can only be offset against taxable gains on other land transactions under any of the land sale provisions in subpart CB of the Income Tax Act.


  • Importantly no loss will be recognised under the new rule if it is attributable to the transfer of property between “associated persons”.  This is potentially a very big trap for the unwary because the definitions are very wide for tax purposes and virtually impossible to avoid.


One of the interesting aspects to emerge from the short but widely subscribed public consultation process was that a number of heavyweight submitters supported the law changes and associated policy objectives, chief of which is to improve compliance with the land taxing provisions and to obtain better information from all people dealing in New Zealand property. We note that broad support was expressed in this regard by the Auckland District Law Society, Chartered Accountants Australia and New Zealand, the Bankers Association, the Real Estate Institute and the Property Investors Federation.

If you need advice on the new legislation or any other land taxing rules, including the range of exclusions that exist, please contact your usual advisor at Johnston Associates for guidance.

Purchased secondhand goods for your business?

In some situations you may have purchased secondhand goods to use in your business but didn’t pay GST on the purchase because the seller wasn’t GST registered. The good news is you can still claim a GST credit as long as the goods were located in New Zealand at the time of purchase and the details of your purchase have been recorded.

You may consider buying secondhand items for your business to save money. Even if the seller isn’t GST registered you can still make a claim for GST.

Regardless of which accounting basis you use, you must make a payment for the goods before you can claim a GST credit for the purchase.

Secondhand goods are commonly defined as goods previously used and paid for by someone else. In the context of GST, secondhand goods don’t include:

  • new goods
  • primary produce – unless previously used
  • goods supplied under a lease or rental agreement
  • livestock
  • fine metal, or goods manufactured from fine metal of any degree of purity


Secondhand goods purchased from an associated person

When purchasing secondhand goods from associated people, the GST credit you can claim is treated differently.

Associated people are:

  • companies controlled by the same persons
  • companies and persons with a 25% or greater interest in the company
  • partnerships and partners in the partnership
  • relatives by blood, marriage or adoption, to the second degree (including people in a de-facto relationship)
  • trustees of a trust and persons who have benefited or are eligible to benefit under the trust
  • settlors of a trust and persons who have benefited or are eligible to benefit under the trust
  • trustees and the settlor of a trust, except where the trustee is a charitable or non-profit body
  • trustees of two trusts that have a common settlor
  • two persons who are each associated with a third person.


If you purchase secondhand goods from an associated person who is not GST registered, the GST claim is based on the lowest of:

  • purchase price
  • current market value, or
  • GST component (if any) of the original cost of the goods to the supplier.


Record keeping

When purchasing secondhand goods you may not always receive a tax invoice. In this case you must record the following:

  • name and address of the supplier
  • date of the purchase
  • description of the goods
  • quantity of goods
  • price paid.

All trusts will need their own IRD numbers from the 1st October 2015

You may be aware, the Taxation (Land Information and Offshore Persons Information) Bill has had its first reading in Parliament and is on track to be implemented on 1 October 2015. As the Bill currently stands, it will affect most property transactions settling from 1 October 2015.

In order to prepare for 1 October 2015, we strongly advise clients that will be affected by this regime and encourage them to take the necessary steps to obtain an IRD number if they do not already have one. If they are an ‘offshore person’ they will also require a New Zealand bank account number.


All trusts will need their own IRD numbers whether Transferor or Transferee.

That includes non-income generating ‘passive trusts’ that own the main home, regardless of who is in occupation. There are many thousands of Family Trusts that will not currently have an IRD number and we have made IRD aware of the implications and timing.  To date IRD is still insisting on the 1 October commencement date, notwithstanding the Bill has not yet passed.

IRD have advised that their processing time for IRD number applications is 8-10 working days. Please note this does not include postage times.

Resident IRD applications must be posted to IRD. However, non-resident (offshore) IRD number applications can be emailed to IRD. Non-resident (offshore persons’) applications are likely to take longer because of the need to open a New Zealand bank account and meet anti-money laundering and Foreign Account Tax Compliance Act requirements.

Some disturbing news – a rise in bankruptcy

It is hard to believe we are through the first half of 2015 and although it has been stated that the New Zealand economy is still seen as a “rock star” economy, I am sure some of you in business may strongly challenge this. With the NZ dollar weakening and dairy prices falling, there have been plenty of businesses that have struggled for some time.


First rise in bankruptcies since 2009

Recent figures from the Insolvency and Trustee Services show 1979 people went bankrupt in the year to June 30, up from 1921 the previous year, showing the first increase since 2009. The increase is small but it is a change in direction from the past five years where numbers have steadily fallen from the 3054 people who went bankrupt in the year to June 30, 2010.

The biggest reason people gave for going into bankruptcy in the 2014 year was losing their job or income with one in five people citing that.

The biggest mistakes people made that landed them in bankruptcy were failing to try and make a deal with the person or business they owed money to, not selling the family home and not telling their other half about financial difficulties.

People are quite reluctant to bankrupt someone, most people would rather do a deal. But where people come unstuck is refusing to deal with the person they owe money to. That causes that person to harden their stance and the debt increases.

So what happens when you go bankrupt?

Bankruptcy normally lasts 3 years and during this time a bankrupt can’t leave the country, go into or manage a business, or be employed by a relative without the consent of the Official Assignee.

During the bankruptcy a bankrupt can’t raise credit in excess of $1000 without disclosing their bankruptcy and must advise the Official Assignee of where they are living, working and what they earn.

Available assets (with the exemption of some statutory assets that remain with a bankrupt) will be sold and the proceeds used to repay creditors.

Public notification of the fact of the bankruptcy is recorded on the Information Technology Services website and stays there for at least 7 years.

Proposed legislative changes for investment properties

In July 2015 Building and Housing Minister Nick Smith announced some important changes to The Residential Tenancies Act 1986 that will affect us all.


What will this mean for Investors?
  • Every Rental property in New Zealand must be insulated by July 2019
  • As of July 2016 all Landlords must state in the Tenancy Agreement the current level of insulation at the time of signing a lease.
  • Every rental property in New Zealand must have working smoke alarms fitted by July 2016
  • A 10 day process to gain back possession of abounded properties and new powers for MBIE to investigate and prosecute Landlords or Property Managers


So What Next?

Although the changes are yet to be made official, they will be presented to Parliament by October of this year in a Residential Tenancies Amendment Bill and it is safe to assume that this will become law.

Important Dates to note

28th October
  • 1st installment of 2016 Provisional tax for those who pay GST twice a year
  • 2 monthly and 6 monthly GST due
1st December XERO price changes will come into effect:
  • Starter $27.50 ( Old price $25.00)
  • Standard $55.00 ( Old price $50.00)
  • Premium $70.00 ( Old price $70.00)

“Best I respect myself and the world hate me, than the world like me and I do not respect myself!”

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this newsletter; always see your professional advisor before taking any action that you are unsure about.