Issues with Overseas Rentals
26 June 2015
Issues with Overseas rentals
If you are a New Zealand tax resident and borrow money overseas, then you may have an obligation in NZ to deduct Non Resident Withholding Tax (NRWT).
A common example of how this occurs is, you buy a rental property in Australia, and borrow $200,000 in Australia. The rental income goes into an Australian bank account and this pays the interest on the loan of say $10,000.
There are 4 options around this:
1. If the Australian bank has branches in NZ , then there is unlikely to be a NRWT obligation. So presuming Westpac and Commonwealth Bank have branches in NZ, then if you borrow from these banks in Australia, there is no requirement to deduct NRWT or AIL. The attached link shows the banks currently registered in NZ - http://reservebank.govt.nz/regulation_and_supervision/banks/register
2. Pay NRWT to NZ IRD. For example, the NRWT rate is 10% for Australia, so pay $1,000 Non Resident withholding Tax if the interest is $10,000 NZD. The Australian bank is unlikely to accept that you should pay $1,000 less to them, so this is likely to cost you an extra 10% or $1,000 in this example. IR291 on the IRD website (www.ird.govt.nz) has more information, and IR 290 has a list of the country NRWT rates.
3. Apply for Approved Issuer Status/ Levy (AIL). This reduces the cost to 2% of the interest paid. So if you paid $10,000 interest, you would pay $200 in Approved Issuer Levy to NZ IRD. IR 395 from the IRD website also provides more information. To do this;
a) You must register as an approved issuer.
b) You must register the loan as an approved security.
c) You and the bank cannot be associated.
d) You and the bank must agree that AIL applies to the loan (IRD recommends that the agreement is in writing).
4. You could borrow from a NZ bank instead to avoid NRWT, but you would need to be careful of exchange rate changes.
So a general tip is to borrow in Australia from a bank that has a branch in NZ such as Westpac or Commonwealth Bank. Otherwise become an Approved Issuer and pay AIL.
4 Year Exemption
If you have moved to NZ, you might be entitled to a 4 year exemption. This means your overseas rental income would be exempt for four years.
- Must not have been a NZ tax resident at any time in the past 10 years, prior to your arrival date in NZ.
- This is a once in a lifetime exemption.
- You and your partner cannot receive Working For Families Tax Credits while being tax exempt from foreign income.
If you think the 4 year exemption may apply to you, I suggest you discuss it through further with me.
Exchange Gain/Loss and Tax
An exchange gain or loss is taxable. This is best shown with an example:
You borrow 100,000 pounds to buy a UK rental.
The exchange rate is 0.33, so in NZ terms this is a $300,000 loan.
Over time, the NZ exchange rate improves to 0.50. Now in NZ terms the loan is only $200,000. So you have made an unrealised gain of $100,000!
Most investors are on cash basis, so if this property in the UK was sold, and the loan in NZ terms had reduced from $300,000 to $200,000, you will need to pay tax on the $100,000 gain!
If the investor is on accrual basis, then they must return the exchange gain or loss each year, even though it is not realised with a sale!
Cash Basis
These are simple notes. If you are investing overseas, I would recommend you get specific advice.
A tax payer whose:
a) Income and expenditure from financial arrangements is $100,000 or less.
b) Value of financial arrangements has a total value of $1 million or less.
A comparison must also be carried out between cash and accrual basis, and if the difference is greater than $40,000, the person must return on accrual basis.
I hope this information has been useful.
Ross Barnett
