Tax Treatment of NZ Investment Property for Australian Tax Residents
Taxation has always been a complex area to navigate. However, when it comes to investing in properties overseas, a thorough understanding of your local tax obligations is important to help you structure your investments to allow you to utilise your losses and minimise tax obligations.
What is tax residency?
For taxation purposes, there will typically be differences in how much and what you will be taxed on by a country, depending on whether or not you are a tax resident of that country. The criteria for tax residence varies internationally, and it is crucial to understand your tax residency as tax obligations in most countries usually differ depending on whether you are a resident or non-resident.
How tax residency is assessed in Australia:
According to the Australian Tax Office (ATO), you are an Australian tax resident if:
- You have always lived in Australia or have come to Australia to live, or
- You have been in Australia for more than half of the income year, unless your usual home is overseas and you don’t intend on living in Australia.
- You have been in Australia continuously for six months or more and have been living in the same place and in the same job.
What are your tax obligations?
As an Australian tax resident, you will be taxed on both your domestic and foreign income. However, the first $18,200 of your total income will be tax-free, with the remainder of your income being taxed at progressively increasing rates. As an Australian tax resident, you are also required to pay capital gains tax on your worldwide assets.
If you live in Australia but you are not an Australian tax resident, you will be only be taxed on your Australian income, if any. However, you will not be able to enjoy the tax-free threshold of $18,200, and your Australian income will be taxed at a flat rate of 32.5%.
With regards to investment properties, how are incomes and losses from my investment properties in New Zealand treated in Australia?
As an Australian tax resident, you may utilise any tax losses from your New Zealand investment properties to reduce your taxable income in Australia. However, your ability to do so will depend on the vehicle in which your New Zealand investment properties are held. In general, if you hold your investment properties under your personal name, you are entitled to offset any losses from those properties against your Australian taxable income.
In contrast, if you are using a look-through company (LTC, see separate article), you will not be able to utilise any losses from New Zealand investment properties for Australian tax purposes as the ATO specifically states a company cannot distribute losses from companies to its shareholders. Similarly, if you hold your New Zealand properties in a trust, you will not be able to use any losses to offset against your taxable income because trusts cannot distribute losses to beneficiaries.
How are realised capital gains/losses on NZ property treated while living in Australia?
In terms of capital gains, Australian tax residents will be taxed on all sources of capital gains, regardless of where the assets are located. However, you will generally be exempt from having to pay tax on any gains realised upon the disposal of the family home, unless it had been rented out for a period of time prior to disposal, or it is on more than two hectares of land.
Capital losses incurred during a financial year are carried forward and can be used to offset against capital gains in later years.
Based on the information outlined above, how should I structure my investments in New Zealand?
In New Zealand, popular ownership vehicles for property currently include trusts, personal name, and LTC. Although trusts may provide additional protection against claims and creditors, they have a major disadvantage from an investment point of view in that only profits, and not losses, can be distributed to beneficiaries. For trusts, losses from properties held in a trust can only be offset against other untaxed earnings the tax may have. As such, you will be unable to use tax losses from properties held in a trust to offset against your personal taxable income.
In contrast, a LTC allows both profits and losses to be distributed directly to its shareholders, who are then taxed at their personal tax rates. However, as previously mentioned, you will not be able to benefit from tax losses generated by properties held in a company for Australian tax purposes. This restriction also applies to entities such as the LTC.
Therefore, if you plan to utilise the tax losses from rental properties in New Zealand, consideration should be given to holding New Zealand investments in your own name. Nevertheless, tax losses in New Zealand can be carried forward and be used towards offsetting income in the future. In this case, a LTC can still be considered if you are thinking about coming to New Zealand in the near future.
What about double taxation?
New Zealand currently has double tax agreements with many countries, including Australia, which outline the treatment of tax in order to prevent double taxation and provide tax reliefs for individuals who are tax residents in more than one country. Earnings from New Zealand properties will only be taxed in New Zealand, and will not be taxed again in Australia. When you dispose of your New Zealand investments, any capital gains realised will be taxed in Australia if you are an Australian tax resident, as New Zealand do not currently tax capital gains.
The information provided in this article is not intended to provide a comprehensive statement of tax laws and should not be used as a substitute for legal advice.
Published on Monday, April 7th, 2014, under Tax