The Inland Revenue Department (IRD) has changed its view regarding nominations of residential sale and purchase agreements.
As you may be aware, New Zealand’s tax legislation was amended in 2015 so that in certain circumstances income tax is payable on profit made from the sale of residential property (generally this applies where the property is sold within two years of purchase and is not used as the owner’s main home). This legislation is also known as the “bright-lines test”.
IRD has previously interpreted the legislation as meaning that if an agreement for sale and purchase is nominated by the original purchaser so that another purchaser completes the transaction (including associated parties, such as an individual to their family trust or a spouse/partner) this is deemed to be a transfer of an interest in land. If the transfer occurred within two years of the date of the sale and purchase agreement and the property had increased in value, IRD was of the opinion that the original purchaser was required to pay income tax on the increase in value, even if no money actually changed hands.
This caused difficulty in Queenstown because the hot property market meant increases in value were likely to occur over short periods of time and, where clients were purchasing “off the plans” before the title for the property had issued, settlement was often not due to occur for months, if not years, after the date of the agreement for sale and purchase. Clients were therefore often required to act quickly to determine and record the ultimate purchasing entity soon after signing the sale and purchase agreement and, in some instances, family trusts were required to be established within days of the agreement being signed.
IRD has now changed its view and has advised that transfers of residential property between associated parties where no money changes hands will not be caught by the bright-lines test meaning income tax will not be payable if property has increased in value between the date of the agreement for sale and purchase and the date of the transfer to the associated party.
If you require more information on the above, please contact us.