Do you have rental property overseas?
If you own a rental property overseas and have a mortgage from an overseas lender read this.
If you own a rental property overseas and have a mortgage from an overseas lender then:
a) Any exchange gain on the mortgage is taxable but the corresponding exchange loss on the property probably won’t be deductible.
Example: Assume Joe owns a UK rental property which cost $250,000, 100% of which is financed. At the time Joe became NZ tax resident the NZ/UK exchange rate was .38. It is now .42 and has been as high as .55.
At the time Joe became NZ tax resident:
$250,000 equated to $NZ 658,000
At an exchange rate of .55 it equates to $NZ 455,000
At an exchange rate of .42 it equates to $NZ 595.000
At the present time Joe’s cost in $NZ to repay the mortgage is $63,000 less than it was when he shifted to NZ. Joe is therefore deemed to have derived taxable income of $63,000. Worse, as Joe’s exchange gain exceeds $40,000 he has to calculate and pay tax on the gain each year. At the time when the exchange rate was .55 Joe had derived a theoretical gain of $203,000 on which he should have paid tax. As the exchange rate drops he then derives a tax deductible loss.
b) Non Resident Withholding Tax has to be paid on the interest paid to the foreign bank, unless that bank has a branch in NZ.
NB – The above is a very simplified summary of which is a very complex area of tax law. If you have an overseas rental property get professional advice.
Persons becoming New Zealand tax resident after 1 April 2006 (Transitional Residents)
From the 1 April 2006, people arriving to live in New Zealand may qualify for a temporary tax exemption on most of their foreign income. This temporary tax exemption is available to those who arrive in New Zealand on or after 1 April 2006 and are new migrants or returning New Zealand who have not been resident for tax purposes in New Zealand for at least 10 years before their arrival in New Zealand.
The exemption can only be granted once in a lifetime.
The temporary tax exemption for foreign income lasts for four calendar years (up to 49 months). The exemption starts on the first calendar day of the month the person arrives in New Zealand and is valid until the last calendar day of that month four years later.
Example: Gabrielle arrives in New Zealand on 22 April 2006 and has one or more types of foreign income that are temporarily exempt from taxation in New Zealand (see list below). Gabrielle is eligible for the exemption from 1 April 2006 until 30 April 2010 which is effectively 49 months.
Types of foreign income temporarily exempt from tax in New Zealand:
- Bonuses from a previous job overseas, even if received after arriving in New Zealand
N.B. If you come to New Zealand, return overseas and come back to New Zealand and receive income from employment while overseas that employment income may still be taxable in New Zealand.
- Controlled foreign company (CFC) income – under New Zealand’s CFC rules
- Foreign Investment Fund (FIF) income, including foreign superannuation under New Zealand’s FIF
- Non-resident withholding tax on foreign mortgages
- Approved issuer levies on foreign mortgages
- Taxation arising from employee share options
- Accrual income from foreign financial arrangements
- Certain trust income
- Rental income derived offshore
- Royalties derived offshore
- Gains on sale of property derived offshore
- Offshore business income (from a business owned personally) that is not related to the performance of
Once the tax exemption ends – after four years (up to 49 months) – the person must declare all foreign income on his or her annual income tax return.
These types of foreign income are not tax exempt in New Zealand:
- Income derived from overseas employment performed while receiving the exemption
- Business income relating to personal services performed offshore.
- Directors fees/salaries from an overseas company will not qualify for the exemption as they are classified as personal services income.
Persons who may not want to apply for the Exemption
The person and the person’s partner cannot receive family assistance while tax exempt from foreign income, so they should determine which option is better for them personally.
a) Gabrielle and her partner receive $1,000 worth of foreign interest per year, but are eligible for family assistance of $5,000 per year in New Zealand if they do not claim the exemption for foreign income. In this situation, it is in their best interests to waive the exemption, pay New Zealand tax on the foreign interest and receive family assistance.
b) Persons who have offshore rental properties which are in a tax loss situation may also not want to claim the 4 year exemption.
International Tax – Top 10 Tax Misconceptions for Individuals – as per the IRD
International tax compliance can be complex and difficult. To help you get it right, the IRD have compiled the following list of commonly misunderstood tax facts relating to individuals:
1. New Zealand residents aren’t just taxed on the income they earn in New Zealand, they are also taxed on their worldwide income.
2. If you leave the country but maintain a permanent place of abode here, you may still be a New Zealand resident for tax purposes, although this may be overridden by a Double Tax Agreement.
3. Foreign income including investments (even if deposited in an offshore account or left on a foreign credit card) is taxable in New Zealand even if it’s not repatriated to New Zealand.
4. Equally, the fact that withholding tax may have been deducted on foreign income does not mean that this income is no longer taxable in New Zealand.
5. A foreign tax credit may be available but only where the tax involved is not subsequently refunded (even in a later income year), it is substantially similar to income tax and cannot exceed the tax otherwise payable on the underlying income in New Zealand.
6. Most overseas pension payments are now fully taxable in New Zealand.
7. Special taxing regimes (controlled foreign company and foreign investment fund rules) apply to gains on certain foreign shareholdings, retirement schemes and life insurance investments.
8. Additional disclosures are required in respect of controlled foreign companies and foreign investment funds.
9. Allowances that may be treated as tax-free in other countries (for example, living-away-from-home allowances) are generally fully taxable in New Zealand.
10. The temporary tax exemption on foreign income for transitional residents expires after 48 months and there is no entitlement to Working for Families Tax Credits during the period of the exemption.