Foreign Residential Rental Property Tax Rules in New Zealand
Tax accounts are usually prepared in accordance with the foreign countries tax rules. As each country has a unique system, the treatment will differ to that applied in NZ.
The differences can occur due to variances in:
- The basis for determining when income is derived
e.g., whether cash or accrual basis has been used
- Balance dates
e.g., NZ has balance date of 31st March whereas this is different throughout the world. For example, in Australia, the standard balance date is 30 June, while in the United States it is usually 31 December. A taxpayer can elect to return certain foreign-sourced income and expenses in the New Zealand tax year in which the foreign balance date falls (s EG 1 ITA 2007). They make the election by including the foreign-sourced income and expenses in their income tax return for the New Zealand tax year – no formal election is required. In this case, for NZ purposes the individual can elect to return the foreign income/expenses in the NZ tax year in which the balance date of foreign country falls. This option is only available to those with net foreign income of under $100,000.
- Methods and rates used to convert amounts of income/expense into NZD
e.g. In NZ, these are provided by the Commissioner of IRD instead of using a spot rate.
Now moving onto income, there are 3 types of income that may arise when a NZ tax resident owns a foreign residential rental property.
The 3 Income Types include:
- Foreign Rental Income
Unless within the transitional period, an individual is required to pay tax on foreign rental income received. This is required even if you are paying tax on the rental income in the country in which the property is located. An individual in this scenario may be eligible for foreign tax credits.
Deductions can be claimed against this income, but the permitted deductible amounts vary from country to country. Examples of deductions include expenses such as repairs & maintenance and depreciation on chattels in rental property. Depreciation on of land or building is not permitted under NZ law. Interest deduction limitation rules apply. And mixed-use assets have certain rules. If the allowable deductible expenses exceed rental income/gains from sale, then they can be allocated to the next year but only to rental income. This is because residential rental deductions are generally ring fenced. These ring-fencing rules do not apply to property that comes under the mixed-use asset rule. More on ringfencing can be found here.
- Foreign Income from the Sale of Property
If foreign property is sold, any gains made may be liable to tax under NZ land taxing provisions. This is the case even if the sale is not taxable in the country where the property is located. The relevant legislation is S CB 6 of the ITA which states that when a property sold was bought with the intention of sale or sold within 5 years (or 2 years if before 29 March 2018), the gains made are not taxable in NZ for the period an individual is a transitional resident. If the gains made from the sale are taxable in both NZ as well as the foreign country, the individual may be entitled to a foreign exchange credit. Currently bright line tax is extended to 10 years with certain exemptions.
- Financial Arrangement Income from Foreign exchange gains
An individual owning foreign rental property is likely to also have a foreign currency loan. This loan meets the requirements of constituting as a financial agreement if fluctuations in the NZD have the impact of varying the amount of interest payable on the loan. When the NZD increases, interest will go down and this has the effect of a gain. If this gain is significant, the individual will be liable for tax on the appropriate amount.
More information regarding the NZ Foreign Residential Rental property rules can be found here.
Now applying these rules to Australian rental income. Buying a property in Australia will have a balance date of 30th June but we can use NZ tax year to report this. Any tax paid in Australia will be used as tax credits. But first, you need to identify if you still want to buy under a company or individual name. More information regarding company and individual ownership can be found here.
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