Tax lawyers and accountants warn IRD drafting of tax aimed at non resident property investors is incoherent and inconsistent; risks slowing rate of new house building Auckland; 'definitions illogical'

By Lynn Grieveson

Lawyers and accountants have described the Inland Revenue Department's drafting of the proposed Residential Land Withholding Tax as incoherent and inconsistent -- potentially resulting in an “own goal” for the government that would slow the rate of house building in Auckland.

The tax is part of the government’s May 2015 package of measures to crack down on avoidance of tax by property investors, and is designed to capture tax owed, under the two-year bright line test, by overseas vendors who sell a residential property within two years of purchase.

Conveyancing lawyers will be required to withhold money from the sale of the property and give it to the IRD.

Submissions to parliament’s Finance and Expenditure Committee on Wednesday were critical of the drafting of the Bill and called for it to be deferred until the inconsistencies could be “ironed out”

Bryce Town of the Auckland District Law Society said that, while the Society supported the withholding tax, the legislation as drafted was “somewhat blunt and due to lacking a degree of sophistication it's going to cause some unexpected damage and will have some negative consequences.”

'May slow down development'

Joanna Pidgeon, the Law Society’s vice president, said the lack of clarity and precision in the legislation meant too much responsibility was being placed on lawyers to exercise discretion and this would result in the “clogging up” of development.

“We don't want lawyers to be having to make determinations, we want the process to be simple, straightforward, black and white because of the consequences on lawyers making those determinations,” Pidgeon said.

“With the case of development land that has been on-sold we don't want lawyers to be making calls or having to get tax opinions when the sale is going through, we want it to be absolutely black and white otherwise lawyers will be erring and saying the tax will apply and that will be a clog on developer's equity and it will slow down development,” she said.

'To much discretion for lawyers'

Town added that lawyers were also concerned that the lack of precise guidance from the IRD meant they would be the subject of their client’s wrath and pressured to exercise discretion in their favour.

Lawyers “don't welcome this obligation and will come under considerable pressure from overseas vendors to exercise the discretion where discretion exists. Lawyers, being cautious, will need to get rulings from the IRD or a tax opinion, whatever they do it is going to cost a lot more money for the vendor,” Town said.

“What we want to see is simple tests that alleviate any need for discretion because the pressure that lawyers will come under from overseas persons. This is a blunt instrument because the tax doesn't take into the real costs of the ownership of that property.People will be very angry that their lawyer is required to take this withholding tax where in actual fact they may have made a very modest profit when you take into account the costs involved and may have in fact made a loss when you take into account all the costs incurred,” he said.

EY executive director David Snell called for the legislation to be deferred, telling the select committee that the “biggest risk this legislation faces in our view is of overkill, inadvertent confusion making life unnecessarily difficult for a range of taxpayers who would be currently compliant”.

 “I think it should be deferred sufficiently to enable the rough edges to be ironed through. I would then suggest a lead time of a number of months particularly because a lot of the detail of this work will have to be done by conveyancers, and conveyancers don't spend their life working through the details of tax legislation so I think there will be a period of education of that part of the profession,” he said.

'Clashing definitions'

Snell agreed with National List MP Chris Bishop, who said it was “bizarre” that the proposed legislation used a different definition of an “offshore person” than that used by the Land Information legislation and the bright line test, which are part of the same package of measures.

He said the definition of offshore person used for the withholding tax would capture “a number of New Zealand companies and New Zealand tax residents,” if just one other person involved with them in a partnership, company or trust met the definition.

Peter Vial of Chartered Accountants Australia and New Zealand said the difference in the definition of an offshore person was illogical and “likely to result in extensive compliance costs.”

Vial warned that a New Zealand couple who sold their home owned by a trust might find themselves subject to the withholding tax if a beneficiary of the trust, such as one of their children, had moved overseas for work.

He also said the costs would outweigh the revenue raised by the legislation, estimating that it would only bring in $12 per property sale when averaged across the 86,000 annual residential property sales.

“We did talk to a range of lawyers and conveyancers and they estimate on average this could cost a residential property seller $200 per transaction, Vial said.