Image: Residential property.

Tax pooling can reduce the interest cost significantly and eliminate late payment penalties if someone owes additional tax for failing to declare property transactions captured under the bright-line test.

An approved provider of the service such as Tax Management NZ (TMNZ) can help with income tax that arises from residential property sales during the current tax year or one just completed, as well as in situations where Inland Revenue (IRD) has issued a notice of reassessment.

We are reminding taxpayers and accountants of the significant savings we can offer on underpaid tax as IRD cracks down on those who have sold houses without paying tax on their profits.

It was a hot news topic just before Christmas.

In case you missed it…

Indeed, the department is cross-referencing tax returns with property transactions and contacting those who may be subject to the bright-line test. Changes in legislation over the last few years requiring IRD numbers to be supplied with all property transactions means it is considerably easier for them to do that.

It’s also another telling reminder of how IRD can match large volumes of data from a variety of different sources. Anyone who underestimates the reach of IRD does so at their own peril. Just ask those buying and selling cryptoassets.

Letters have gone to those whose property sales might be within the bright-line test.

Some letters advise that taxpayers will need to return this income in their next tax return. Others are showing the tax as being overdue (due to the sale occurring in the previous tax year).

IRD is also encouraging accountants to talk with clients who sold residential property to ensure they’re aware of their obligations.

They estimate that up to 25 percent of investors may not have paid the relevant tax.

And given the heat in the residential property market and the media attention that escalating prices are attracting across New Zealand, it’s likely this is just the beginning of the campaign.

Remember, there is no statute of limitations on how far back in time IRD can go if undisclosed profits from the sale of a property are taxable under the bright-line test.

Bright-line test – a brief overview

The bright-line test requires income tax to be paid on the gains made if a residential property is sold within two years if it was purchased between 1 October 2018 and 28 March 2018 inclusive, or within five years if it was bought on or after 29 March 2018.

This rule also applies to New Zealand tax residents who buy overseas residential properties.

Exclusions only apply for the sale of the main family home or when someone sells a property they inherit. The same applies if you’re the executor or administrator of a deceased estate.

Under the bright-line test, you can use the main home exclusion if the following two situations apply:

  • You have used a property as your main home for more than 50 percent of the time you’ve owned it.
  • You have used more than 50 percent of the property’s area (including your backyard, gardens and garage).

It’s important to remember that having the intention to use the property as your main home is not enough. You must have actually used it for this purpose.

You can only use the main home exclusion twice within a two-year period. It does not apply if you show a regular pattern of buying and selling residential property.

Please note the bright-line test does not replace existing property tax rules such as the ‘intention rule’. You might still need to pay tax on your property profits even if the bright-line rule does not apply.

You can find out more information on IRD’s website.

What to do if you have a received a letter

While a letter from IRD can be alarming, there may be no need to panic straightaway.

That’s because in some circumstances they may not be applying the law correctly due to not having all relevant facts. After all, they’re only as good as the information they have.

There have been cases where communication issued by the department relates to property sales that are exempt under the main home exemption or where a house was actually purchased before the bright-line test was introduced. Moreover, IRD is identifying property sales in the current tax year before the taxpayer has had a chance to discuss their position with their accountant or turn their mind to filing a tax return.

To their credit, they have at least publicly acknowledged they sent some letters by mistake.

Nonetheless, you should seek specialist advice if you are unsure just to be on the safe side.

Tax laws around property are numerous and complex, not to mention costly if not planned for in advance. After all, charges interest (currently seven percent) if you don’t pay your tax on time and late payment penalties.

Talking with a specialist will save you money whether there is or isn’t tax to pay on the profit made from a residential property sale.

If you have not returned the correct taxes, then you should complete a voluntary disclosure as soon as possible.

This can see the brutal shortfall penalties IRD may seek to impose on the unpaid tax reduced. Shortfall penalties range from 20 percent up to 150 percent of the tax liability.

How TMNZ can assist with bright-line transactions

If you owe additional tax due to the sale of a property under the bright-line test, TMNZ can apply tax paid to IRD on the original due date against your liability.

You pay the core tax plus TMNZ’s interest to us rather than paying IRD directly. Once we receive your payment, we transfer the date-stamped tax amount you require from our account at IRD to your IRD account.

As the tax carries a date stamp, IRD treats it as if you have paid on time once it processes this tax pooling transaction.

This eliminates any late payment penalties incurred. (Tax pooling cannot assist with shortfall penalties unfortunately.)

TMNZ’s interest cost you can give you significant savings on the interest IRD charges if you underpay your tax.

There are some legislative conditions that you must meet to use tax pooling.

For the current tax year (2021) or one just completed (2020), you have up to 75 days past your terminal tax date for that tax year to pay the additional provisional or terminal tax you owe via TMNZ.

In the event you receive a notice of reassessment from IRD, we can only assist with the difference between the original assessment amount and the reassessment amount.

You have up to 60 days from the date IRD issues the reassessment notice to pay the tax you owe via TMNZ.

Please contact us if you have any questions about tax pooling.