In this blog I look at the tax implications of a New Zealander investing in property offshore. While there is much coverage of the implications of investing in property in NZ, there is less commentary on offshore investment.
While many of the same rules apply, there are some additional hooks that can catch the unwary. At a commercial level offshore investment can be attractive, opening up your capital to new markets, while at the same time posing challenges from a pragmatic perspective. While acknowledging these issues, the focus of this article is the tax implications here.
Same Core Rules Apply
If you buy an investment property offshore, the first point to appreciate is that more or less the same core rules apply to that property as do to a New Zealand rental property. Income derived is assessable, and the same expenses that are deductible in relation to a New Zealand property are deductible in relation to an offshore property. This is regardless of what deductions are permitted offshore. For example, while it is possible to claim capital allowances in relation to buildings in some countries, you cannot claim building depreciation here.
Another set of rules that apply regardless are the new ring-fencing rules. A tax loss produced by residential rental property offshore is ring-fenced and only able to be offset against residential rental-related income in the future.
Another rule which applies regardless of geography is the bright-line rule. If you buy a residential property offshore and sell it within five years for a gain, the gain is taxable. By the same token, other land tax rules, such as the tainting provisions, also apply irrespective of the location of the property if owned by a New Zealand tax resident.
If you have a property that is producing a taxable profit, it is highly likely that you will pay tax offshore and then have to return profit here. This gives rise to the possibility of paying two lots of tax in relation to the same lot of income. If you are able to claim a credit for the tax paid offshore, you only end up paying tax in New Zealand if the tax payable here is higher. Unfortunately, getting your structure wrong can see you paying two lots of tax. Without going into this point in great detail, a conventional company often leads to double taxation because you have tax at company level offshore and then eventually have to return that income at shareholder level here, but the company does not have imputation credits to prevent double taxation.
If you borrow funds from a non-resident lender in a foreign currency, there are a couple of potential tax issues that you may not expect. First, interest paid to a non-resident lender can be subject to non-resident withholding tax (NRWT). This often comes as a surprise because interest is of course an expense to the New Zealand based borrower. The purpose of NRWT is to levy tax on the income of the offshore lender, but it ends up being a cost to the New Zealand based borrower. That said, there are exemptions to NRWT. Seek advice on this.
The other unexpected tax issue arises out of the fact that fluctuations in the exchange rate will see the New Zealand dollar value of the foreign loan increase or decrease. These movements are ultimately taxable. This can see an investor face a tax liability because borrowings denominated in US dollars, for example, have dropped in value in New Zealand dollar terms. While there is no real gain, tax law deems there to be a taxable gain.
In summary, there can be commercial benefits in investing offshore and getting access to foreign markets. There will be complexity in operating in the foreign jurisdiction, but the complexity also extends to New Zealand where there are tax implications on the basis of tax residency. As always, we recommend that tax advice is sought if you are either contemplating investing offshore or currently have offshore investments and are concerned that you are not complying with the rules discussed above. You can contact us at GRA to talk about these issues by phoning (09) 522 7955, emailing firstname.lastname@example.org or by filling out our online form.