With the government's shock introduction of laws slashing interest deductions on existing rental properties, where can you as an investor put your money? What will get you the best return while still maximizing tax deductions? We present 9 strategies:
IRD has encouraged all Tax Agents/Accountants to send this to their clients each year.
Good question. The best answer is: look at the flow-chart below (kindly provided by IRD).
Basically, if you have overseas investment property and you have a mortgage with an overseas bank, then you might have to pay NRWT.
NRWT is Non-Resident Withholding Tax. Essentially, if you're paying interest, dividends or royalties to people (and banks, e.g. a mortgage with an overseas bank) who aren't New Zealand tax residents, you'll need to deduct NRWT. However, there are exceptions. We'll write some more about that soon, but here's a link to check out in the meantime.
The other alternative is to pay AIL (Approved Issuer Levy). If you pay interest to a (non associated) non-resident lender, and want to pay it at a zero rate of NRWT, you have to apply to Inland Revenue to become an approved issuer. Instead of deducting NRWT, approved issuers must pay a levy on the securities they register with Inland Revenue.
Again, we'll write some more about this later, but here's some bedtime reading on the subject.
Are You A "Cash Basis" Person?
What we refer to above is known as a financial arrangement, ie if you have overseas investment property and you have a mortgage with an overseas bank. IRD says that if you are a "cash basis" person, you have to account for changes +/- in foreign currency as well!
Here's how to tell:
The criteria for a person to be classified as a Cash Basis Person are that the value of all financial arrangements of the person do not exceed certain values and that there is not a difference between accrual and cash recognition exceeding $40,000. This $40,000 is cumulative from year to year.
The rules under the first criterion are that one of the following is satisfied:
Nope. No Idea!
Still stuck? Contact us or your tax professional
What is FATCA?
The IRD explains it nicely here. As they put it:
The Foreign Account Tax Compliance Act (FATCA) is United States of America (USA) legislation that aims to reduce tax evasion by USA citizens, tax residents, and entities.
Essentially, it's a reporting regime to make sure that USA persons (and New Zealanders with accounts in the USA) meet their tax obligations.
As part of FATCA, USA citizens/tax residents who have certain foreign financial assets that exceed certain thresholds must report those assets to the United States Internal Revenue Service (IRS), whether they live in the USA or not.
Who does FATCA apply to?
FATCA requires foreign financial institutions (namely, financial institutions outside the USA) that are not exempted, to register and report to the IRS on details of financial accounts held by USA citizens, tax residents and others.
If you are a US citizen or your parents are:
Please note that if you fall into one or both of these categories, then you will now be required to file yearly tax returns with the USA, even if you have never lived or worked there. There are firms that specialise in this; please also see this article.
I'm not a US citizen or tax resident. Why is my bank writing to me about it?
You'd have to ask them that. Probably covering themselves to make sure they are compliant with FATCA.
This means that if you buy rental property in Thailand and it makes a profit, then you'll have to declare that income here in New Zealand as well as in Thailand.
Secondly, there is a Double Tax Agreement between Thailand and New Zealand, so tax paid in each country is taken into account.
How does it work then?
If you own property in Thailand in your personal name then you'd be required to file for it there, and then declare the income here as well. NZ would calculate the tax paid there, and what should have been paid here. If there is a difference in your contra, then you'll have to pay the difference to IRD. If the difference is in your favour, then you don't get a tax credit: you just won’t have to pay any more.
Thailand Tax Information
Corporate income tax rates:
Personal income tax
Info sourced from:
So, you’d need to get advice from a Thailand-based accountant obviously, but a Thai company would pay between 20-23% tax, and then a 12.5% property tax on top. However, as it is all in THB this still may be relatively low in NZD. So this may well be the best way to go.
For the UK, see this article; for Australia, check out this blog; for Malaysia, see here; Singapore? See this article.
We have no affiliation with or endorsement from KPMG or Thailand-Property.com.
The problem: You have an overseas pension, e.g., in the UK. You want to transfer it here. Why should you act soon? What do you do?
Act sooner rather than later
Well, in early 2014 a bill was approved by the NZ Parliament. It was called the Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill. What's it all about? See here for an overview. It will essentially affect people who hold overseas pensions or have transferred their pensions here since 2000.
How so? As Diana Clement wrote in the NZ Herald; "Hundreds of thousands of Kiwis are up for a tax king hit. And many of them have no idea it's coming." Why? She goes on to say "IRD found that 70% of a sample of 869 people who had transferred their pension here had evaded tax."
Basically, if you have an overseas pension in any country except Australia, you could soon be paying tax at your marginal rate (anywhere from 10.5% to 33%) and then on up to 100% of the value of the pension. An amnesty was declared until April 1 2014. In other words, if you transferred your pension here before then, or if you'd already transferred since 2000 and not paid the correct tax, you would have only been taxed on 15% of your pre-1 April 2014 withdrawals at your marginal tax rate.*
So, what's the IRD's problem? Ms Clement goes on to say: "The issue for the IRD is that overseas pensions often grow tax-free, whereas KiwiSaver is taxed every year until retirement. [Their] argument is that New Zealand residents who hold these overseas pensions are at an unfair advantage over Kiwis who are paying into KiwiSaver."
How is this different from the old regime?
The Herald article explains: "Under the old FIF (foreign investment fund) rules ...New Zealand residents who held overseas pensions paid tax annually on the capital gains of the fund. The new rules will see people taxed only when they transfer money out of their UK pension as a lump sum or regular distribution."
How will the tax be calculated?
It'll all depend on how long you've been resident here. For the first four years after you move here your foreign income will generally be exempt from tax in NZ (see this article). However, after that, the percentage of the capital that is taxed then increases each year.
Here's an example: Let's project ourselves into the year 2025. You arrived in NZ in 2000, so you've now been here in NZ for 25 years. You never transferred your UK pension here, so you're paying more and more tax on the capital amount each year. Now, you owe tax at your marginal rate on all of your withdrawals. That likely now equals about 33% of your entire overseas pension!
Ouch! What do I do?
Well, this is a specialist field, so we recommend a pension-transfer company. They'll generally take a cut - perhaps up to 5% - of your pension when you transfer it here. If you pension is in the UK, it can only be transferred into approved managed funds, called QROPS (qualifying recognised overseas pensions schemes), or KiwiSaver. However, be careful: Some KiwiSaver funds are QROPS-approved, but there are also non-KiwiSaver QROPS. That's why it's good to get a reputable and experienced firm to handle the transfer.
But what about the currency?
You might be waiting for the GBP to rise. That might not happen for a while, according to industry experts. However, one thing you can do is move your UK pension into a sterling-denominated superannuation fund here rather than a New Zealand dollar-denominated fund. However, there are lots of "gotchas." For any queries around these, and for other currencies, ask your pension-transfer company.
Should I really do something now? I think I'll just wait and see
Well, you could. We are well past the 1 April 2014 deadline now so if you're only just reading this today then the amnesty has been and gone.
My pension is an Australian one. What about that?
As the Herald explains: "The new tax does not apply to Australian Superannuation." However, some feel this is a little unfair. For example, you go to South Africa, and contribute to a super fund there. Your brother goes to Oz and does the same, contributing the same amount. However, the IRD treats your pension differently from your brothers.
I've actually been using the FIF rules. Can I keep doing that?
Yes, you sure can. You might even be better off.
FIF? What's that?
Basically, Foreign Investment Fund (FIF) rules are there to declare your foreign investments, as the name suggests. If you haven't been using these up until now, the proposed new rules will effectively be compulsory.
Look, I'm really having trouble getting my head around all this!
Feel free to call us on 099730706 or email us. We would recommend you talk to an AFA about it too.
* Assuming you choose the Schedule Method. There is an alternative called the Formula Method, wherein you are taxed on your actual investment gains while resident in NZ. However, there are certain conditions that need to be met if you wish to use this method, and it requires you to supply a ton of information, so we expect most will find this method unsuitable.
NB1: Note that you can calculate your taxable income based on the tax rules that you should have applied at the time (assuming you've been very naughty and kept quiet all these years). However, by the time you pay interest and penalties it might have been cheaper to take the 15% option!
NB2: As a general rule of thumb, if you've been in NZ for over 7 years you will possibly pay less tax if you had transferred your funds before 1 April 2014 than if you do so after that.
NB3: Further reading: Check out this excellent article by NSATax
NB4: Information provided on this website is not intended to provide an exhaustive or comprehensive statement of tax law and should not be used as a substitute for considered written advice. All information published is subject to our standard terms and conditions and disclaimer
Image courtesy of Stuart Miles at FreeDigitalPhotos.net
We contacted the Inland Revenue Board of Malaysia (IRBM) with this scenario and these questions:
"Let's say I live and work in Malaysia, but I own a rental property in New Zealand. A tax return will be filed for this property with the Inland Revenue Department of New Zealand. My questions are:
Here is their reply, word for word:
So, much like the UK (but unlike Australia), your rental losses here in New Zealand can't be offset against income earned in Malaysia. However, any tax paid here on profits from rental property will be recognised by the IRBM.
Remember, even though you live and work in Malaysia, you'll still have filing responsibilities here in New Zealand, namely a non-resident personal tax return/s for the owners and an IR3R rental tax return.
Please call us on 0800 890 132 or email us.
Please see the following entries for tax treatment of rental property in NZ by Australia, Singapore , Thailand and the UK.
NB: Information provided on this website is not intended to provide an exhaustive or comprehensive statement of tax law and should not be used as a substitute for considered written advice. All information published is subject to our standard terms and conditions and disclaimer
Image courtesy of foto76 at FreeDigitalPhotos.net
Let's say that you live and work in Singapore. You own a rental property here in New Zealand. How do you handle this from a tax perspective here in New Zealand, and in Singapore? Does it make a difference if the property is negatively or positively geared?
As a rental property owner, you will have to file tax returns here in New Zealand, regardless of whether you are tax resident or not. If the property is owned in your own personal name (or with your partner), then the profits or losses are split 50/50. If you have New Zealand income apart from this which has been taxed, e.g., wages, interest, then any losses can be offset against this tax paid. Profits, less deductible expenses, are paid for at personal tax rates. Accounting is a 100% deductible expense! If there is no other income against which a loss can be offset, then the loss stays here in New Zealand, being carried forward from year to year, until such time as there is a profit against which you can offset it.
If your rental property is owned by a Look Through Company (LTC), then the situation is similar.
We contacted the IRAS regarding Singapore's treatment of losses or gains from rental property in New Zealand; here's what they said:
"All foreign-sourced income received by resident individual in Singapore (excluding foreign-sourced income received in Singapore through partnerships in Singapore) on or after 1 Jan 2004 is tax exempt in Singapore.
(1) Given the above, since the rental income from New Zealand is not subject to tax in Singapore, any losses from such nature cannot be offset against any of the resident individual's income in Singapore.
(2) As mentioned above, since the rental income from New Zealand is not subject to tax in Singapore, any tax paid in New Zealand is not taken into account here in Singapore."
See here for more information.
In other words, Singapore isn't interested in what you are making or losing here in New Zealand, unlike the New Zealand government, which taxes it's residents on all worldwide income.
Questions? Give us a call on 0800 890 132 or email us.
For the UK, see this article.
For Australia, check out this blog.
For Malaysia, see here.
Thailand? See this blog entry.
Image courtesy of noppasinw at FreeDigitalPhotos.net
So, here's the situation: you have a rental property here in NZ, and it is making a loss i.e. it is negatively-geared. You're living and working in the UK. The question is: can you offset these losses against your income earned in the UK? (Or put more formally: "Does HM Revenue & Customs (HMR&C) allow losses from rental property in New Zealand to be offset against personal waged income earned in the UK?"
Sadly, the answer is "No." We wrote to HMR&C recently and here's what they said: "In the UK the income from property is classed as a businesses and cannot be relieved against general income except in the case of exceptional expenses associated with capital allowances." The HMR&C Property Rental Toolkit also says "Any rental business loss is automatically carried forward and set off against rental business profits of the following year. Rental business losses cannot be set against general income except in limited circumstances. From April 2011 furnished holiday letting losses can only be carried forward and set off against furnished holiday lettings profits of the same business."
So, what now then?
So, what happens to them? In the situation mentioned above, you have to file annual tax returns in NZ. Assuming you've made no taxable income in NZ, the losses then just get carried forward until such time as you've got something to claim them against here in NZ. Or in Australia. Do you have to show these losses on your UK tax return? Probably, but that's a question for your accountant in the UK.
Does it make a difference if you're tax-resident or not? No. You still will have a tax return filing obligation here in NZ, and the losses can't be offset against your UK income. They can only be carried forward.
Read HMR&C's Property Rental Toolkit here (PDF). See also this page at the IRD website which covers what to do if you have rental property in a country other than New Zealand, and this page which details the Double Taxation Agreements between NZ and the UK.
Confused? Call us on 0800 890 132 or contact us.
If you're working in Oz, it's a bit different. See this article for more info.
See this article.
See this blog.
Please see this link.
Image courtesy of basketman at FreeDigitalPhotos.net
Some of our clients live and/or work overseas, and have asked us about non-residency status with regards to tax.
The IRD has Double Taxation Agreements (DTAs) with a number of countries, meaning that tax paid in one country is counted when filing tax returns in the other country, so that you don't get taxed twice.
The IRD explains it this way: "You may be a tax resident in both New Zealand and another country or territory. This means that you are a resident in two countries or territories and subject to the tax laws of each. If both countries or territories tax their residents on worldwide income you could be taxed twice on the same income. Double tax agreements (DTAs) have been negotiated between New Zealand and many other countries or territories to decide which country or territory has the first or sole right to tax specific types of income."
Click here to see the current list of countries with whom NZ has a DTA. Note that the arrangements vary from country to country, so you need to check out the specifics.
Non-residency means that you are taxed as a non-resident on any income derived here in NZ. These rates are significantly lower than normal tax rates, e.g. the non-resident tax rate for the United Kingdom is 10-15%. See here for details
Working out if you are a resident or not for taxation purposes
It may not be as straightforward as you think (I'm not trying to rain on the parade here!!). Here's what the IRD says:
For tax purposes you are a non-resident if you are away from New Zealand for more than 325 days in any 12-month period, and do not have an enduring relationship with New Zealand.
So, how do you know if you have an enduring relationship with New Zealand? Happily, IRD has published a guide to help you work it out. As with virtually everything, this is self-assessed and honesty-based. Make sure that your conclusion is that of the hypothetical "reasonable person." See also this page at the IRD website, which contains a common example scenario, wherein someone lives in the UK but owns property in NZ
Let's say that you work out that you are not tax-resident in New Zealand, and you own rental property here:
Other helpful links
What is my personal tax residency?
What income is taxable in New Zealand?
New Zealand tax residents with overseas interests
Top 10 facts on international tax
Give us a call on 0800 890 132 or email us.
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Accounting for your rental residential investment property; specialised property tax advice. Buy me a coffee!