Investing In Australia From New Zealand
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.
The following are some of the most frequently asked tax and structuring questions.
Where are you taxable on the rental income?
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 New Zealand 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, you do the same calculations using Australian tax rules.
The main difference in income tax position between New Zealand 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 New Zealand, no depreciation can be claimed on buildings. Both tax jurisdictions allow depreciation of chattels via chattel valuations.
How does capital gains tax in Australia work?
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.
Should you set up a company to purchase the Australian rental property?
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. It is the simpler option and will likely minimise tax payable in Australia.
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.
What are the implications of borrowing in Australian dollars?
There are two key implications the investor should be aware of.
1. Possible application of NRWT
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.
2. The accrual rules
Where you borrow from a foreign bank in foreign dollars, the loan will be classed as a financial arrangement for New Zealand tax purposes. This means 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).
Do you need Foreign Investment Review Board (FIRB) approval?
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.
Will you pay stamp duty?
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.
- Will you be borrowing in Australia, and if so, what do you need to do to avoid NRWT in New Zealand?
- 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?
- Will you be able to offset your foreign loss against your CGT liability?
- Have you dealt with the accrual rules issues that arise cross border?
- 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.