INVESTING IN AUSTRALIAN RESIDENTIAL PROPERTY
There are many New Zealanders who have chosen to invest in Australian residential rental property, and this brings with it a number of important considerations.
I have been asked many times what is the best option for this investment, i.e. personally, in a company or in a trust.
Investing via a company is not desirable due to the likelihood of double taxation issues. So the other options are personally or a trust. There are pros and cons for both, but fundamentally it comes down to availability of losses for individuals and asset protection for trusts.
Trusts in Australia are very complex, as is taxation for both individuals and trusts. As such, before leaping in boots and all it is a good idea to seek advice from the Australian taxation angle.
Regardless of the ownership structure, because the rental property is generating Australian sourced income it will have to complete an Australian tax return. If taxable income is generated then income tax will need to be paid in Australia. If taxable losses occur, they will be available to be carried forward and offset against future taxable income from the property.
A New Zealand resident tax payer is taxed on their worldwide income. No matter whether they are individuals or a New Zealand trust, the same Australian sourced income will need to be returned to the Inland Revenue Department. As with Australia, if taxable income is generated then income tax will need to be paid in New Zealand. If taxable losses occur, they will be available to be offset against a future rental surplus, or if the relevant taxpayer has other income during the year, it can be offset against that income.
It doesn't seem fair that income tax will be paid twice on any rental surplus, once in Australia and once in New Zealand, so there are double taxation rules that come into play. 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.
The calculation of the Australian rental taxable income or loss that has to be returned in Australia is carried out using Australian rules. In New Zealand you calculate the Australian rental taxable income or loss under the New Zealand rules. The fundamental differences between New Zealand and Australia's tax position concerns depreciation of buildings. In Australia no depreciation on buildings is allowed on those built before September 1985, whereas in New Zealand depreciation on buildings is not allowed from the 2012 income tax year. The depreciation of chattels is similar in both countries.
Capital gains tax is applicable in Australia. This tax is payable when the property is sold and the amount of tax paid is dependent on the structure adopted, as different tax rates and rules apply to different entities.
There are very complex New Zealand rules surrounding New Zealand investors borrowing money from an Australian bank to purchase an Australian residential investment property.
There is the possible need to pay NRWT (Non Resident Withholding Tax) to the Inland Revenue. Further, the loan will be classed as a financial arrangement for New Zealand tax purposes, which means that foreign exchange gains and losses associated with the loan will need to be included in the New Zealand tax return.