A Few Reminders - New Zealand Rental Property

1. Remember that the receipt of NZ$1 of rental income does require lodgement of a New Zealand taxation return.

2. Repairs, maintenance and/or renovations carried out during a period when a property is not rented, are not deductible. Such costs are treated as putting a property in a position to earn subsequent rental income.

3. To ensure that such costs can be deducted, have the property rented or at least available for renting when carrying out such repairs and maintenance.

4. Remember all borrowing costs are deductible including legal fees in arranging finance.

5. Make sure you separate land/building/chattels for the purposes of depreciation. The rates available for furnishings such as carpets/blinds carry a much higher rate than for whiteware, which again carries a much higher rate than for the building itself.

6. If the prime purpose of any travel to New Zealand is to check up on the rental property, talk to agents or to check that tenants are looking after the property, then a good portion of travel costs will be deductible against rental income.

New Zealand Tax Update (January 2009)

NZCCHK member Des Trigg provides an update and summary of New Zealand tax

1. New Zealand imposes income tax on a residency/source basis. It taxes residents on total worldwide income, while it taxes non-residents on New Zealand sourced income only.

2. Individuals are resident in New Zealand if they have a permanent place of abode (effectively one’s home) in New Zealand. There is a second test of tax residency. An individual is deemed resident if they have spent more than 183 days in total in any continuous 12 month period in New Zealand. If this test is met, tax residency commences from the first day of the 183 day period.

3. A company is resident if it is incorporated in New Zealand or its head office, centre of management or the place from which directors exercise control is situated in New Zealand.

4. The residence of a trust is determined by the residence of any settlor.

5. Foreign sourced income is subject to New Zealand tax at the taxpayer’s marginal tax rate. Foreign tax paid is available as a credit up to the equivalent New Zealand tax imposed. Passive income subject to non-resident withholding tax [NRWT] is available in full as a credit. This is provided either by way of a double tax treaty or domestic tax legislation. Imputation credits attached to foreign dividends are not available as a tax credit.

6. New Zealand adopts a comprehensive international tax regime under which New Zealand residents are subject to New Zealand tax under either the Foreign Investment Fund (FIF) or Controlled Foreign Corporation (CFC) regimes. Under the CFC regime, foreign sourced income of a foreign company controlled by New Zealand shareholders is attributed back to the New Zealand shareholder. Where an New Zealand resident has an interest in a FIF there is a requirement to calculate and return income attributable to that interest. Thus income is taxed as it is earned.

A person has FIF income if inter alia that person has rights in a foreign company, foreign superannuation scheme, rights under a life insurance policy issued by a non-resident and such rights/entitlement are not otherwise exempted or fall within the CFC regime.

7. There is a dividend withholding payment regime which is a backstop to FIF/CFC rules. It essentially acts as a tax to mop up any untaxed foreign income that is eventually distributed back to New Zealand. Certain exemptions apply.

8. With respect to foreign dividends, NZ has introduced a fair dividend rate [FDR] regime. The FDR has been set at 5% and applies to portfolio investments in offshore shares and to the market value (MV) of such shares. It applies from the first day of a taxpayer’s income year commencing on or after 1 April 2007. Australian listed investments (in general) are excluded from the FDR regime. The FDR is deemed to be the return (including dividend) from the investment in the offshore shares on an annual basis.

Assume a taxpayer holds offshore shares with a MV of NZ$100k at 1 April 2008. During the year the taxpayer acquires another NZ$20k, which is held at 31 March 2009. During the year ended 31 March 2009, the taxpayer receives a dividend of NZ$3k. Shares have a MV of NZ$121k at 31 March 2009. Under FDR the taxpayer would be taxed on NZ$5k (5% of NZ$100k). However, if the taxpayer can show his actual return is less than NZ$5k, he would be taxed on that lesser amount. In the illustration, the taxpayer has received dividends of NZ$3k plus gain of NZ$1k to equal NZ$4k. As a result, tax would be imposed on NZ$4k in the 2009 income year.

9. There is a four year domestic income tax exemption in respect to foreign sourced income (other than employment or services income) available for overseas individuals who become tax resident. The exemption is not available if the person has been an New Zealand resident within the previous 10 years.

10. Unlike Australia, New Zealand does not have a capital gains tax as such. There are certain transactions however (e.g. property dealers/developers and traders in equities), where any gain/loss is assessable/deductible.

11. Once a New Zealand expat or immigrant moves to New Zealand, they will become subject to New Zealand tax on their worldwide income (subject to the four year exemption in Item 9).

12. Although New Zealand residents cannot benefit from foreign imputation credits, New Zealand effectively allows a portion of the imputation credits attached to New Zealand sourced dividends to be received by non-resident shareholders. This is achieved through a foreign invested tax credit [FITC] regime, the result of which is that the investor receives a credit of 15% non-resident withholding tax.

13. An entitlement under a foreign superannuation scheme is prima facie subject to New Zealand tax. If received as a pension, the amount of the pension is taxable. If received otherwise, proceeds fall within the FIF regime. Certain exemptions can apply.

14. There is opportunity to establish a foreign trust as an investment vehicle prior to establishing New Zealand tax residency. Foreign sourced income of that trust can remain outside the New Zealand tax net until distributed to an New Zealand resident beneficiary. This is so, even where the individual establishes New Zealand tax residency. Opportunity can be taken to make such distribution during the four year tax exemption period.

15. New Zealand residential property has been a favourable investment option for non-resident investors. Negative gearing allows losses to be offset against current and future assessable income. Gains from the sale of such investment properties are generally not liable to New Zealand tax.

16. Depreciation on residential structure/contents is available as a deduction against rental income. Depreciation claimed is recoverable on sale.

17. Funds borrowed offshore to purchase such property create an NRWT liability (10%/15%) on interest paid to the lender. There is an option to adopt a tax deductible levy (2%), which is itself deductible. Failure to deduct NRWT has caused problems to such investors.

18. Individual marginal tax rates as at 1 October 2008 [applicable to net taxable income per annum]: NZ$0–14,000 is 12.5%; NZ$14,001–40,000 is 15.0%; NZ$40,001–70,000 is 33.0%; and NZ$70,001+ is 39.0%.

19. New Zealand resident companies and New Zealand subsidiaries of a foreign company are taxed on net income after allowance deductions. The current company tax rate is 30%.

20. Non-resident withholding tax (NRWT) is charged on dividends, interest and royalties remitted from New Zealand to non-residents. The rate is generally 15% (interest/royalties) and 30% (dividends). As referred above, to the extent that dividends carry imputation credits, the FITC regime can reduce or eliminate NRWT. In respect to countries with which New Zealand has a double tax treaty, NRWT is reduced to 15% (dividends) and 10% (interest/royalties).

NRWT on interest can be substituted with a 2% approved issuer levy which is payable by the borrower [the 2% itself is tax deductible]. This is not available where the parties (lender/borrower) are associated.

Disclaimer: This update is provided by Des Trigg CA Tax Consultant of Auckland. The content is for information only and should not be acted upon without specific and proper professional advice. Neither the NZCCHK, author nor any staff member accept any liability to any other party.

Des Trigg CA, Tax Consultant, Phone (DDI): +64 9 308-1867 Fax: +64 9 303-2322 Mob: +64 21 768-967
Website: www.destrigg.co.nz Email: des@destrigg.co.nz

Important Note:
The above article(s) were provided by Des Trigg of BDO Spicers, Auckland. The contents of each article are for information only and should not be acted upon without specific and proper professional advice. Neither NZCCHK, the author nor BDO Spicers accept any liability to any other party. Des Trigg may be contacted via the following: Tel: + 64 9 308 1867 Fax: + 64 9 303 2322 or E-mail: des.trigg@xtra.co.nz