Overseas Rentals Explained
There is easy and rough terrain to negotiate if you are considering investing abroad, writes Mark Withers.
1 January 2023
With the tax scene for New Zealand residential investment is in a state of hibernation until we see a change in government, you might be wondering about the challenges of investing overseas.
The bad news is the bright-line rules do apply to overseas residential rental property. The good news is that interest on loans used for overseas properties remains tax deductible. That’s the case whether the loan is borrowed in NZ dollars against other security, or borrowed in foreign currency and secured by the foreign property itself.
Funding NZ properties with foreign debt does not give rise to an interest deduction here. As a New Zealand tax resident you are required to declare your worldwide income, including the income from foreign rental properties.
Identifying and taxing foreign income has actually been an area of focus for IRD in recent years. The IRD use information shared by foreign banks to identify Kiwis with interests abroad and use rating information to identify Kiwis with foreign properties.
Despite the income being assessable in NZ, you will generally also have a filing obligation in the country you have invested in. If there is tax payable on this income overseas the NZ authorities give credit for the tax paid overseas up to the level of your effective tax rate in NZ. If you have paid 20 per cent tax overseas but are on a 33 per cent tax rate in NZ, you will top the tax up by 13 per cent in NZ.
Some countries, including Australia, have different balance dates than NZ. This is generally ignored by electing to return the foreign sourced income in the same NZ tax year under section EG1. Rules around what can and can’t be claimed differ country to country, so adjustments may be needed to overseas financial statements. Foreign financial statements will be denominated in foreign currencies and must be reported in NZ in NZ dollars, requiring these to be concerted.
‘Always seek specialist tax advice in NZ and in the country you are planning to invest in before buying’
FOREIGN BANK LOANS
Now, the hard part … foreign denominated bank loans. These introduce a wild card as the gains and losses caused by movements in exchange rates when applied to your foreign debt are taxable in New Zealand.
Here’s an example. Joe has an AUD mortgage for $700,000 used to buy an apartment on the Gold Coast. When he borrowed it the conversion rate to NZD was 90 cents. This meant the debt in NZ dollars was $777,777.
At balance date though the kiwi had strengthened against the Aussie to 95 cents. So, his Australian loan now only requires NZ$736,842 to repay it. This represents an on-paper gain of $40,934. This gain is taxable in NZ, potentially on an unrealised basis year-on-year. Deductions are available if the exchange rate goes the other way.
Where interest is paid on foreign loans NZ does not get to tax the profit the foreign bank makes out of you. This leads us to the non-resident withholding tax (NRWT) regime that requires tax to be withheld from interest payments to foreign banks at a rate of 10 per cent.
An alternative to this exists because many foreign lenders won’t accept anything other than the full interest payment each month. This system is known as approved issuer levy. You apply for this through IRD and pay a two per cent levy on the interest you are paying overseas and this in effect opts you out of the requirement to
Some foreign banks are exempt from NRWT due to banking licences in NZ. It’s a distinct advantage to deal with a bank that has an NRWT exemption.
In Australia they have stamp duties on land purchases and these are particularly high for non-resident buyers. While NZ does not have a capital gains tax many other countries do. You will be expected to comply with this local tax obligation in those countries.
If you have moved to NZ from overseas or are a Kiwi who has been abroad for 10 years or more and have overseas rental property, you are generally exempt from declaring foreign income for four years. After this period you will need to declare and comply with the tax rules on your worldwide income.