Taxation (Residential Land Withholding Tax, GST on Online
Services, and Student Loans) Bill
26 January 2016

Introduction
1. The Property Law Committee (“the Committee”) of the Auckland District Law Society
Inc. welcomes the opportunity to make submissions on the Taxation (Residential
Land Withholding Tax, GST on Online Services, and Student Loans) Bill (“the Bill”).
This submission will focus only on the Residential Land Withholding Tax (“RLWT”)
aspects of the Bill.
2. The time for consultation on the Bill has been limited in light of the Christmas/New
Year holiday period. In the little time available the Committee has considered the
Bill and the Commentary Paper and makes the following submissions.

Negative Impact on the Development of New Housing
3. The development of residential housing in New Zealand is not only carried out by
New Zealanders but also by offshore persons. Historically, offshore persons have
developed property in New Zealand and paid their tax. If the new legislation does
not include an exemption for these people of good repute and requires them to pay
RLWT on each transaction that comes within the Brightline test these developers will
suffer serious cashflow consequences. Cashflow is of course a critical element for
any property developer and given the inability to offset costs when the RLWT is paid
this new regime will act as a major clog on the development of residential property
in New Zealand.
4. Both apartment developments and subdivision sections are often sold “off the
plans” well before the title is issued, and for both apartment buildings and bigger
subdivisions there can be extensive capital expenditure which does not get taken
into account under the brightline test. This may encourage offshore developers to
delay going to market and then completing construction to prevent the clog on their
capital.

 5. The development of housing has been a topic du jour for some time and in effect the
government will be scoring an own goal by failing to include an exemption for
reputable offshore persons/developers.
6. A solution is at hand and that is the use of a bank bond. Bank bonds have
traditionally proven to be an effective technique of avoiding the cash flow dilemma
for developers in relation to their dealings with territorial authorities.
7. The bond can be registered on the titles of unsold properties to secure payment of
RLWT at a later date and discharged when the RLWT obligation is met.
8. In order to avoid the significant clog the RLWHT will have on property development
we submit a bond system is incorporated into the legislation.

Costs
9. The imposition of “paying agent” status (cl44. RL 2 (2)) upon lawyers when acting for
an “offshore person” will add significantly to the costs of carrying out a conveyancing
transaction.
10. The lawyer will now be required to determine whether the tax is applicable,
calculate the correct tax and the pay the tax. The danger of failing to adequately
address the issues involved will increase the lawyer’s exposure to risk and thus
increase their professional indemnity insurance premiums.
11. These costs will be passed on to the consumer which in turn will negatively impact
New Zealand’s reputation as a straightforward and cost effective place to deal with
land.
Penalties
12. The IRD have not indicated what penalties the lawyer will incur if they get it wrong in
their role as “paying agent”. How will their conduct be assessed and what standard
of inquiry is expected from them?
13. Offshore vendor’s will try to do everything possible to avoid paying the RLWT and
will place extreme pressure upon the lawyer to determine that the tax is not
applicable.
14. The legislation must include precise tests so that a lawyer can decide whether or not
the tax is applicable without having to obtain an expert tax opinion. The Bill must
clearly set out the mechanics of the process in an effort to minimise any discretion
on the lawyer’s part. Without the ability to exercise discretion the lawyer will be
able to rebuff the undoubted attempts of the off shore vendor who is seeking to
avoid paying the tax.

2

 15. It is critical to lawyers that any penalties imposed are deemed to be “civil” penalties
rather than “criminal”. If the penalty is deemed to be “criminal” it is likely to impact
on the lawyer’s ability to continue to practise law.

Avoidance
16. The legislation does not deal with the undoubted techniques that will be used to
avoid the RLWT. In particular option fees could be used to disguise the purchase
price and therefore to reduce the RLWT. Parallel agreements are also likely to be
used. A separate chattels agreement which uses an inflated value to consequently
deflate the property purchase value could also be used. The legislation needs to
specifically address these techniques if it is to retain its integrity.
17. Is there a duty on the lawyer to investigate or to take into account when assessing
values any mechanisms in a sale and purchase agreement to reduce the purchase
price? Is it explicit that there is no duty for a lawyer to inquire behind certified
statements? What if they have either knowledge or a suspicion that a certified
statement may be incorrect? The legislation must deal with these issues.
Definition of an Offshore Person
18. For a company (or unit trust) to qualify for the non-offshore exemption, all of the
following must be met:
a) The company is registered in New Zealand, and
b) All directors and executives are non-offshore individuals, and
c) No more than 25% of the shareholder decision making rights are held by
offshore persons.
19. We submit that these requirements are excessive. There will be some companies
which are quite clearly domiciled in New Zealand and are registered New Zealand tax
payers that may have an offshore director, it seems to be going too far for these
companies to be classified as offshore. A requirement for the majority of directors
would be superior to the requirement for all.
20. It is likely to be damaging to New Zealand industry to exclude all overseas based
individuals as directors. It is not uncommon for such directors to bring an
expertise/experience that is not readily available from within New Zealand.
21. Many companies will have a plethora of shareholders, some of whom may be
disengaged with the actions directors are taking and it may be impossible for a
lawyer to assess whether 25% or more of the shareholders are offshore persons,
which would not be the case in a closely held company. How will a lawyer make a
determination in that instance?

3

 22. Could they rely on certifications of directors, or rely on the residential addresses
registered at the Companies Office to make that determination, or a combination of
the two? There shouldn’t be any comeback on the lawyer if they have made their
best efforts to ascertain this. The legislation should be clear as to what can be relied
on.
23. For a trust, the rules are more complicated and if any of the following apply the trust
will be an offshore person:
a) The trustee is an offshore person
b) The trustee has a co-trustee who is an offshore person
c) A settlor is an offshore person
d) All natural person beneficiaries are offshore persons
e) All beneficiaries and all discretionary beneficiaries are offshore persons
f) A beneficiary who is an offshore person has received a distribution from the
trust within the last six years of a relevant disposition of residential land.
A corporate trustee will need to meet both the company and trust criteria for the
exemption to apply.
24. As for requirement at clause 45 (8)(b)(iv) of the Bill and repeated above at para 23.
(e)- Discretionary beneficiaries have no entitlement to trust monies and so their tax
status should be irrelevant.
25. Further, the requirement at clause 45 (8)(b)(vi) of the Bill (above at para 23. (f))- –
will this apply even if that person is now an offshore beneficiary but was not offshore
when the distribution was made? Are lawyers going to have to view 6 years of trust
accounts to view distributions made or can they rely on the certifications of
trustees?
26. We envisage further problems relating to the tax status of settlors. Many settlors
are lawyers or accountants, and may not have powers of appointment or control
after a trust has been settled. They may also be impossible to track down in
intervening time if they no longer have an involvement with the client.

Priorities
27. The amendment to the legislation (from the original issues paper) is supported as it
deals with the practical reality of often only being told of the amount required to
repay a mortgage on the day of settlement, and negotiating a different figure with a
bank if possible could have clogged the chain of settlements on settlement days.

28. Under the amended legislation the RLWT has priority ahead of mortgage repayment
sums. While it is acknowledged an adjustment has been made to allow for a
modified repayment sum to be utilised which can cause the RLWT to be reduced
4

 there will need to be a further priority amendment to allow the payment of the real
estate agent’s commission and the lawyer’s legal costs.
29. Without the ability of land agents to be paid for their endeavours in selling a
property or lawyers being able to deduct from the sale proceeds their costs in
priority to the RLWT neither the land agent or the lawyer will be prepared to act. So
that there is no misunderstanding, the legislation will need to be modified to include
the ability of real estate agents and lawyers to be paid from the sale proceeds ahead
of the RLWT if the new regime is to work.
Administration of the Withholding Tax
30. Here we include several problem scenarios that require addressing before the RLWT
comes into effect:
a) What happens if there are joint vendors and only one vendor is an offshore
person?
b) What if a property is being sold with one purchase price but includes more
than one certificate of title, and some titles do not have houses on them?
c) How will a lawyer apportion the value of a purchase price when the land has
subsequently been subdivided and sold as separate lots, particularly if one lot
has a pre-existing house on the land and the others are bare sections?
31. We request that the IRD answer these questions and provide extensive examples of
how other different scenarios should be treated. This will be of great assistance to
the “paying agent” and will in turn cut down on queries received on the RLWT
enormously.
32. Will there be a dedicated resource within the IRD to provide support to paying
agents who are making assessments and require assistance?
33. The provision for the paying agent to pay the RLWT on settlement of the sale or
monthly at the option of the agent would be appreciated. As well as written
confirmation from the IRD of the amount of RLWT received in relation to the Tax
Payer so that this can be provided to offshore clients for offshore tax returns they
will need to comply with in their respective tax jurisdictions
34. Paying agents should be able to issue the RLWT certificates for their clients.
35. The requirement to file an interim income tax return. Will this just cover the costs in
relation to the actual property or is it the tax payer’s wider tax affairs to that date?
36. It would be helpful if certifications required by vendors under this legislation were
included in the tax statement so that there is not further paperwork for information
a conveyancing agent is relying upon for certification.
5

 37. We submit that an online tax calculator for RLWT will need to be created for the 1
July 2016 commencement date.
38. What is not clear from the definition is whether the RLWT applies only to the GST
exclusive amounts. If the amounts are GST inclusive this would lead to inaccurate
amounts being deducted.
39. And finally, the actual RLWT in every situation will be more than the actual tax owed,
if any. This is because the RLWT calculation does not allow for costs of acquisition,
costs of disposal, any improvements, or any existing losses. Or in the case of a
resident co-owner they may not be liable for the tax at all. There is no reason why
the tax could not be allocated on a percentage of ownership basis. This would save
all the extra costs of recovering the refund, not to mention the opportunity cost of
the use of the money.
40. The government is essentially receiving a loan from taxpayers for the over taxing,
and the taxpayers receive only a small amount of interest (which is subject to tax), in
compensation.
Auckland District Law Society Inc. Members will be happy to enter into further discussions
with the IRD to fine-tune the operation of the RLWT.
Auckland District Law Society Inc. records that it will want to be heard at the Select
Committee hearing.

Bryce Town
Convenor Property Law Committee,
Auckland District Law Society Inc.

6