In this section of our website we look at some of the tax and structuring issues that arise out of a New Zealand tax resident investing in Australia.
Take the example of a New Zealand investor buying a rental investment in Australia. We will assume that the investor already has a look-through company [LTC] set up that holds investments in New Zealand.
The following are some of the most frequently asked tax and structuring questions.
As the rental income is sourced in Australia it is returned there, and as the taxpayer is resident in New Zealand it is returned here as well. In other words, you need to do two tax returns, one in each country at year end. The NZ tax year runs to 31 March each year and the Australian tax year to 30 June.
A couple of important points in relation to this:
a) Although the income has to be returned in both countries it does not automatically follow that there are two lots of tax to pay. Firstly, the property may be running at a tax loss anyway. Additionally, if tax is paid in Australia, then in general a tax credit is allowed in New Zealand for the tax paid, up to the amount of tax that is payable here.
b) Secondly, the calculation of the amount of rental profit or loss that has to be returned in New Zealand in respect of the Australian property is carried out as if the property was subject to New Zealand tax rules. That is, when you calculate the amount to be returned in New Zealand, the New Zealand rules, including the New Zealand depreciation rates, are applied. In the Australian tax return, do the same calculations using Australian tax rules.
The main difference in income tax position between NZ and Australia will stem from depreciation on buildings, which in Australia is 2.5%SL (with properties built before 15 September 1985 getting no depreciation claim). In NZ no depreciation can be claimed on buildings. Both tax jurisdictions allow depreciation of chattels via chattel valuations.
The fact that you calculate and return the rental income on both sides of the Tasman may seem like a disadvantage, but it can actually prove to be an advantage in that a “double dip” on any tax losses may be available.
If the rental property runs at a loss according to NZ rules, that loss will be available to offset against other taxable income in NZ (provided the structure is appropriate – more on that below). Another way of looking at this is to say that in NZ, the treatment of rental losses from an Australian property is exactly the same as if the property were owned in NZ. A New Zealand property running at a loss will reduce tax payable on other income – so will an Australian property.
The double dip arises because the losses are returned in Australia as well. Assuming there is no other income in Australia, the losses accumulate and carry forward. They are then available to offset future capital gains tax in Australia.
Capital gains tax applies in Australia on the sale of investment properties. Note that the level of tax payable differs depending on the structure. This is because there are different tax rates and also different rules.
The answer to this is likely no. In general, company ownership is the least desirable option for investing offshore due to the likelihood of double taxation and the lack of capital gains tax discount in Australia.
What are the best options then?
The best options are likely to be investing personally or via a Trust. There are advantages and drawbacks of both. In general, at least initially, personal ownership will be preferable from a tax perspective, as it will afford the investor the opportunity to access potential losses from the rental investment and offset those losses against salaries or other personal income.
However, this is not desirable from an asset protection perspective. If the investor’s priority is asset protection, they will look to purchase via their trust. We note that the Australian rules regarding taxation of trusts is a specialist area and we would strongly recommend the investor have the Australian tax implications of their trust investing in Australia examined before arriving at a conclusion.
There are two key implications the investor should be aware of.
Where a New Zealand resident pays interest to a non-resident lender, the interest is subject to non-resident withholding tax [NRWT]. In the context of an Australian bank, NRWT applies at a rate of 10%. Although NRWT is directed at taxing the non-resident that is deriving the New Zealand-sourced income, it is inevitable that it is the New Zealand investor that bears the cost.
There are three exemptions from NRWT that can apply.
Firstly, where a New Zealand taxpayer borrows from certain banks that operate in both New Zealand and Australia, e.g. Westpac, there is no obligation to deduct NRWT. A full list of these “approved” banks can be obtained from the Reserve Bank website (www.rbnz.govt.nz).
Secondly, you can apply for approved issuer status and pay a 2% approved issuer levy instead of NRWT.
Finally, you can borrow from a New Zealand bank, so that NRWT does not apply at all.
Where you borrow from a foreign bank in foreign dollars, the loan will be classed as a financial arrangement for New Zealand tax purposes, meaning that foreign exchange gains and losses in respect of the loan are included in the taxpayer’s New Zealand tax return.
There are differences in how this is returned depending on how the investor invests and what assets they have. In general, individual investors only have to account for this on the maturity of the arrangement rather than each year (provided they qualify for the cash basis person exemption).
If a foreign person wishes to invest in Australia, then approval is needed from FIRB. However, New Zealand citizens are exempt from getting this approval.
Please note that this exemption does not extend to trusts or companies. Thus, you will not need approval if you purchase properties in Australia as an individual but you will need approval if you purchase the property under an entity. Furthermore, FIRB will only approve purchases of a new property or a property that you intend to increase the number of dwellings on.
It is important to remember that stamp duty is payable when purchasing Australian rental property.
If you need to borrow money, we recommend you include the stamp duty figure in the overall mortgage. Whilst mortgage interest is deductible, the actual stamp duty is not. It is treated as a capital expense for tax purposes.
There are a number of issues to consider for a Kiwi investor in Australia.
1. Will you be borrowing in Australia, and if so, what do you need to do to avoid NRWT in NZ?
2. Will you be negative for tax on the investment (i.e. running at a loss), and if so, will your structure proposed allow you to access the loss?
3. Will you be able to offset your foreign loss against your CGT liability?
4. Have you dealt with the accrual rules issues that arise cross border?
5. Does your structure avoid the possibility of double tax on income arising from cross border investment?
For an interview to discuss these issues please let us know, but regardless, make sure you have dealt with these elements in your tax planning.
This letter is to express my appreciation for the assistance and encouragement of both Anthony Lipscombe and particularly John Heaslip over the last financial year. The period since activating my trading trust has been one of considerable stress, as well as personal development, as I embarked on this as a relative business neophyte with virtually no awareness of the contemporary requirements of running a business, particularly the financial records aspect. During much of this period I have therefore felt considerable out of my depth. However I have been lucky enough to have had the benefit of the advice and support of John Heaslip in rationalizing what was a fairly chaotic set of records of the first year property trading. I am able to say that John in particular, has been unstinting in his attention to my needs and has done so in a manner which has never alluded to my extremely rudimentary grasp of managing a business, or even of being unable to set out a spread sheet properly. The result of the above guidance is that now, although my trading trust would still not be able to operate without the advice of GRA, I do least feel a sense of satisfaction that I have got to my present point without major disaster and that my property trust does now have some kind of firmer basis for any future activities
Name withheld by request