Those of you who have PC property in NZ and are an Australian resident for tax, what structure do you buy your NZ properties under?
I have had some advice that I should do it under my own name (I am a kiwi living in Aus and am registered as a non-resident for tax purposes in NZ, and salary earner in Aus) but this doesn’t sound right to me. What experience have others had ?
Thanks.
Be encouraged to run the race …
who gave you advice and why doesn’t it sound good to you? cause in the end you will shop for advice until you find some that tells you what you already believe.
Go to your accountant and get professional advice. opinion shopping here will give you responses from a whole lot of investors. some earn 300k per annum from a job and own 2 negatively geared properties and 1 CF+ve one in NZ. Others earn 10K p.a., buy in their own name and own five in NZ.
others have family trusts and distribute earnings to (i.e.) their mothers.
some have fancy structures within structures that cost them hundreds in fees per month!
it all depends on things like how much you earn, how many properties you want to buy, how much income they will make, whether you want ‘asset protection’ i.e. so you can’t be sued for your property because ‘you’ don’t own it, etc etc,
your income bracket and how much tax you are paying, time frame, etc etcOnly a professional can discuss this with you and give you the right advice. And even then, take it with a grain of salt because SOME want you to have complicated structures just so they can get the fees for starting and running them each year
joy to the world
It was an accountant .. a NZ one who specialises in property no less. I am talking to another accountant shortly, but I was curious to find out if others had made mistakes in the structures they had set up and therefore hopefully learn from their mistakes (or success).
Smiley
Be encouraged to run the race …
Hi,
It does look your accountant is giving you the runaround!
I speak from experience as a property investor in Australia and practising as a CPA in public practice in Australia for six years and, after four years experience as an accountant in New Zealand, specializing in property investment in New Zealand.
Ask your accountant a simple question, “If I own the NZ properties in my own name and I am an Australian tax resident, will I pay CGT on the capital gains on the sale of my NZ properties?”
The answer will be, “Yes.” Then ask him/her, “Then why would I want to own the properties in my own name?”
I have posted other options in this property forum and others in New Zealand, in the interests of affording investors the information to make more informed decisions. And it does not concern me if you do not buy a trust or other structure from me or another accountant or lawyer in New Zealand.
It is enough for me to know that you are now aware of the tax issues should you decide to buy the NZ properties in your own name. You can no longer say that no-one advised you of the options and the consequences.
Using Trusts to own properties in New Zealand means that you can organize your affairs so that you do not have to pay CGT in Australia, and that is a good option if you are seeking to maximize your net wealth.
It is also possible to make capital distributions that are not sourced from capital gains, so you can receive cash from the property without paying tax in Australia. This way, the cashflow is not just one way to New Zealand with no return.
Trust accounting and tax can be done for a reasonable cost – say $300 to $400 pa. A company may cost more than that, as companies with foreign/Australian shareholders must have their Accounts audited, raising the compliance costs.
The costs for doing your rental property accounting and tax if under your own name would be about the same as for the Trust, maybe $100 less.
And maybe I’m scaring you needlessly with the spectre of CGT. As one of the earlier contributors wrote, much depends on your income and whether or not your property investments will be cash-flow positive or negative.
You are probably aware that the ATO will not allow you to claim for your NZ rental property losses – IRD do allow NZ tax residents to claim for tax losses on their Australian rental properties.
So if your NZ properties are running at a loss, you accumulate the losses in Australia and carry them forward to claim against future capital gains and/or rental profits. Let’s say you make a capital gain, you declare 50% of the capital gain (there is an automatic exemption of 50% since September 1999) then take off your carried forward losses on the rental property. So maybe there is no tax to pay anyway.
You need to look at your investment strategies, come up with some likely scenarios and then discuss the way forward with your accountant.
Happy investing!
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzthat was great advice Chris, i just startin lookin at NZ. So say i on 80-100k, purchase 1st property in NZ and possible more in future so what u say how i should structure it??
tks in advance.
p.s email if u can in case i dont checkin in here regularly ok.Hi Yuyu,
I see that you have joined in this forum and posted another topic.
Your income alone isn’t going to give an adviser all the information to give you a comprehensive answer, but let’s have a go.
Let’s make an assumption that you have a deposit or equity to make the NZ property purchase, and that there will be 80% borrowing, and that you are looking at properties with high rental yields but low capital gain, then it is likely that the property breaks even or shows a small loss or profit.
Many NZ advisers will say buy in your own name or through an LAQC company. These options are not for non-residents as they will pay CGT if in their own name or the LAQC company is of no benefit to them as they don’t have NZ income to use the losses attributed from the company – hence the acronym LAQC for loss attributing qualifying company. And eventually they will say to transfer the property into a Trust for asset protection.
For the overseas investor in New Zealand there is no point in waiting. Buy the property in a Trust, so the asset protection is there immediately. The property will either show a small loss or profit from the start, and will continue to generate net profits into the future. Depreciation will lessen the tax liability and allow for capital distributions to the Australian beneficiaries without tax consequences.
When the Trust sells the property and makes a capital gain, the capital gain replenishes the capital depleted by distributions from the non-cash depreciation charge. As long as the capital distributions are not funded from the capital gains, there is no tax to pay in Australia. The Trust has made the capital gain, not the beneficiaries in Australia, so no tax is payable.
And no CGT is payable in New Zealand. So all of the tax laws are adhered to and no more tax is paid than what has to be paid. The retention of the capital gain in the Trust helps to fund future property purchases by the Trust, so that the Trust will not have to call on the beneficiaries to fund deposits for the second and subsequent property purchases.
Now you see why I like Trusts for overseas investors. Also, if a dividend is paid by a company to an overseas investor, they do not receive the benefit of the tax paid on the company’s profits – the imputation credit. New Zealand and Australia have signed an agreement to allow half of the imputation credit. If a Trust distributes tax paid income to an overseas investor, they receive the full benefit as a foreign tax credit.
If in the example given above, the property has a lower rental yield and high capital gains potential, the overseas investor will have to top up the excess over expenses over income each year, and receive all of that back after say five years when the property is sold, with a healthy capital gain. The net capital gain (after deducting carried forward rental property losses) will have to be left in the Trust and can be used to fund future property purchases.
I have investment analyses that show how this works with real investment scenarios available in Auckland. It would not be hard to input other figures into the model to see how a proposed investment elsewhere will fare. This allows the investor to know what they are facing bfore making the investment – always a good idea.
I have posted this to your private mail also.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzHi Chris,
Originally posted by masteraccountants:You are probably aware that the ATO will not allow you to claim for your NZ rental property losses
I just saw this (I haven’t been here for a while) and thought that this was no longer the case.
According to ID 2002/764 in the ATO legal database:
IssueIs the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest expenses incurred from 1 July 2001 in relation to a foreign rental property?
Decision
Yes. The taxpayer is entitled to a deduction under section 8-1 of the ITAA 1997 for interest expenses incurred from 1 July 2001 in relation to a foreign rental property.
Facts
The taxpayer is an Australian resident.
The taxpayer owns an overseas rental property.
The taxpayer borrowed money to fund the purchase of the rental property.
The taxpayer is assessable on the foreign rental income.
The interest expense on the loan exceeds the rental income from the rental property.
. . . .
For income years commencing on or after 1 July 2001, debt deductions are no longer subject to foreign loss quarantining.
I gather this is only the case though if the property is in the taxpayer’s own name, not some other entity.
This is assuming of course that I’m understanding it correctly, and that it hasn’t changed again since.
Regards,
GPHi GP,
Yes, that is an interesting Income Determination from the ATO.
The use of the word “taxpayer” means that the ID can apply to any taxpayer, as companies and trusts are also referred to as taxpayers.
The ID goes on to say –
“For income years commencing on or after 1 July 2001, debt deductions are no longer subject to foreign loss quarantining. The definition of ‘foreign income deduction’, to which the foreign loss quarantining provisions apply, now excludes debt deductions to the extent they are not attributable to any overseas permanent establishment of the taxpayer (subsection 160AFD(9) of the ITAA 1936).”
The last sentence seems to not exclude from the quarantining provisions (that is include in the quarantining provisions) debt deductions that relate to foreign entities of the taxpayer.
So your understanding that it only relates to individual taxpayers is correct.
The ID has not been withdrawn at the time of posting this reply, so it is still current.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nzdoes that then apply to other property expenses as well ie can an Australian resident now claim all NZ property expenses or just interest?
Kiwa67
Hi,
The way that tax law works, you can effectively claim for the other NZ property expenses.
Tax law says that an expense can only be claimed once against the relevant income. Once you claim the property interest in your personal tax return, the ‘balance’ of the property Accounts will be likely to show a profit – if it is the interest especially that generated a taxable loss – and the ‘profit’ will be recorded in your personal tax returns as overseas rental income.
You claim the interest separately in your tax return from the overseas rental property income & expenses, then show the overseas rental property net income in the appropriate part of your income tax return. You cannot claim the interest again in the rental property section.
ATO ID 2002/764 gives Australian accountants an opportunity to do some fancy tax footwork, and I suspect they may charge extra for the service.
The more complicated the tax system becomes, the more accountants rub their hands. On the other side of the ledger, accountants do have costs in keeping up-to-date with tax legislation changes, so it is reasonable to charge their clients for the costs of keeping up-to-date to provide the best level of services and comply with tax laws.
Christopher Raynal
Master Accountants Group Limited
PO Box 46018 Herne Bay
Auckland New Zealand
Ph +64 9 360 3259
Fax +64 9 360 2180
http://www.masteraccountants.co.nz
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