Investing in Australian rental property - NZ tax perspective
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Articles by John Heaslip
There are a number of issues that New Zealand tax residents must grapple with if they are to invest in Australian rental properties. It’s important to understand what these issues are because they can have a significant impact upon your profitability.
Financial Arrangements - foreign exchange gains & losses
Holding an Australian mortgage on a rental property in Australia constitutes a "financial arrangement" for New Zealand tax purposes. This means that any foreign exchange gains or losses on the Australian loan must be brought into your New Zealand tax returns, as they constitute taxable profit/loss here.
The default method for allocating income of a financial arrangement is the "accruals" method. The accruals method means that foreign exchange gains or losses must be brought into your tax returns on an "as you go" basis at the end of each financial year. However, there is an exception to using the default accruals method and it is if you qualify for use of the "cash basis" method.
A cash basis person is not required to use the accruals method and return foreign exchange gains or losses at the end of each financial year. Instead, foreign exchange gains or losses do not need to be returned until the maturity of the financial arrangement (i.e. when the debt is repaid), or if there is an accumulated foreign exchange gain or loss of $40,000 or more. In order to meet the definition of a cash basis person, interest on all debt held by the taxpayer must be under $100,000 in any given financial year, or the total value of all financial arrangements which the taxpayer is a party to must be $1 million or less.
Example of foreign exchange gain or loss
Andrew borrows A$750,000 to fund his rental property in Australia.
• On 1 April 2017, the exchange rate is 0.8900.
• At 31 March 2018, the exchange rate has changed to 0.9850.
• Convert A$750,000 to New Zealand dollars on 1 April 2017 = NZ$842,697
• Convert A$750,000 to New Zealand dollars on 31 March 2018 = NZ$761,421
The difference is a $81,276 exchange gain. This means Andrew needs to pay tax on $81,276 in New Zealand for that financial year.
Non-resident Withholding Tax
If you are paying interest on an Australian mortgage and you are a New Zealand tax resident, there is a requirement to withhold Non-Resident Withholding Tax (NRWT) on interest paid to foreign lenders. Specifically in regards to Australia, you would be required to withhold NRWT of 10% on the interest paid and return this to the IRD.
However, there is an exemption, this being:
• Applying for an approved issuer status with IRD, which allows you to deduct approved issuer levy instead of NRWT. When the status is granted, you do not have to pay NRWT. However, you pay the approved issuer levy, which is calculated at 2 cents per $1.00 of interest paid. Note that Approved Issuer Levy Status cannot be obtained retrospectively. That is, once an obligation to deduct NRWT arises you need to apply for approved issuer status immediately.
What this means in a practical sense
• Applying for an approved issuer status with IRD, which allows you to deduct approved issuer levy instead of NRWT. When the status is granted, you do not have to pay NRWT. However, you pay the approved issuer levy, which is calculated at 2 cents per $1.00 of interest paid. Note that Approved Issuer Levy Status cannot be obtained retrospectively. That is, once an obligation to deduct NRWT arises you need to apply for approved issuer status immediately.
What this means in a practical sense
Let’s say you have borrowed A$750,000 at 5% from an Australian bank. You have fixed the loan at interest-only for 3 years. The first year you need to pay interest to the bank of A$37,500. As such, you are required to withhold 10% of the interest and remit it to the IRD. This means only A$33,750 arrives at the Australian bank. The Australian bank will not like this and will require an additional A$3,750 from you or you are in default. Your only remedy is to remit an additional A$3,750 to the Australian bank.
Summary
If you are a New Zealand tax resident and own residential rental property in Australia, or are about to, the above rules will apply to you and will impact your profitability and your after-tax cash flow. If you have concerns about this, please get in touch with us at [email protected], via our website, or by phoning +64 9 522 7955.
Summary
If you are a New Zealand tax resident and own residential rental property in Australia, or are about to, the above rules will apply to you and will impact your profitability and your after-tax cash flow. If you have concerns about this, please get in touch with us at [email protected], via our website, or by phoning +64 9 522 7955.
John Heaslip
Business Advisory Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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