Offshore Investing
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Articles by Matthew Gilligan
At the time of writing, Labour's new foreign buyer ban has just passed through Parliament and while this signals that New Zealand is closing its doors to foreign investment, the same does not necessarily apply in reverse to New Zealanders looking to invest offshore. While doing so can be a logistically challenging exercise, it can also provide great rewards.
Like all investment activities though, there are tax implications for New Zealand tax residents investing in property offshore.
Firstly, as a New Zealand tax resident you are obligated to account for your worldwide income to the Inland Revenue Department (IRD) here. This means you approach the tax treatment of property owned offshore as if it were situated here. The calculation of a rental profit or loss is the same for New Zealand tax purposes (currency differences aside) whether the property is situated in Noosa or Nelson. While my focus is on the New Zealand tax implications, you will typically be filing a tax return in the offshore jurisdiction as well. This will form the basis of your return here, but if there are claims that are allowable in the offshore jurisdiction that are not allowable here, then you need to reverse those claims. Depreciation on buildings is an example, whereby some offshore jurisdictions allow it, whereas New Zealand does not.
If the New Zealand calculation shows a profit there will be tax to pay here, although you can claim a credit for any tax paid in the offshore jurisdiction. If the New Zealand calculation shows a loss, you may claim the loss against New Zealand income – subject to the impending ring-fencing rules. This can be thought of as a “double dip” in that you claim losses in the jurisdiction in which the property is situated (usually against later rental profit or gains realised on sale) and claim the same losses against income here.
While returning the rental income here is relatively straight forward, there are some more complex and arguably unexpected outcomes. If you are paying interest to a non-resident lender, you often have an obligation to deduct non-resident withholding tax (NRWT) from the interest payments and pay it to the IRD. Because the non-resident lender is unlikely to have much sympathy for your obligation to do so, it ends up being a cost that you bear. The default rate of NRWT is 15% but it is often reduced to 10% if there is a double tax agreement in place. There are exceptions to NRWT, including where you borrow from a bank that operates via the same legal entity in New Zealand (e.g. Westpac and Commonwealth Bank). You can also be exempt from deducting NRWT if you register as an approved issuer and pay an approved issuer levy of 2%, provided you register before you start paying interest to the non-resident lender.
The other often overlooked implication of investing offshore arises if you borrow in a foreign currency. Under the “financial arrangement” rules, fluctuations in the value of the loan in NZ dollar terms are included as either taxable gains or losses in New Zealand tax returns. For example, if you have US$1m of borrowing that translates to NZ$1.5m at the time of uplifting the loan, but is worth NZ$1.2m at the time the loan is repaid, you are deemed to make a $300,000 taxable gain. Of course you derive no real economic gain, as you used the money to buy a US asset that declined in relative value at the same time (currency wise). Unfortunately, tax law only looks at the loan side of the equation and deems you to have made a gain. That said, these rules can work in your favour if the NZ dollar weakens relative to the currency that you have borrowed in because then you are deemed to suffer a loss that you can claim for tax purposes.
In summary, don't forget about New Zealand tax implications when it comes to investing offshore, and as usual, you should seek expert advice. If you would like help from GRA with this, please see your Client Services Manager, or contact us at info@gra.co.nz, by phoning +64 9 522 7955, or by filling in our online form. We would be very pleased to assist you.
If the New Zealand calculation shows a profit there will be tax to pay here, although you can claim a credit for any tax paid in the offshore jurisdiction. If the New Zealand calculation shows a loss, you may claim the loss against New Zealand income – subject to the impending ring-fencing rules. This can be thought of as a “double dip” in that you claim losses in the jurisdiction in which the property is situated (usually against later rental profit or gains realised on sale) and claim the same losses against income here.
While returning the rental income here is relatively straight forward, there are some more complex and arguably unexpected outcomes. If you are paying interest to a non-resident lender, you often have an obligation to deduct non-resident withholding tax (NRWT) from the interest payments and pay it to the IRD. Because the non-resident lender is unlikely to have much sympathy for your obligation to do so, it ends up being a cost that you bear. The default rate of NRWT is 15% but it is often reduced to 10% if there is a double tax agreement in place. There are exceptions to NRWT, including where you borrow from a bank that operates via the same legal entity in New Zealand (e.g. Westpac and Commonwealth Bank). You can also be exempt from deducting NRWT if you register as an approved issuer and pay an approved issuer levy of 2%, provided you register before you start paying interest to the non-resident lender.
The other often overlooked implication of investing offshore arises if you borrow in a foreign currency. Under the “financial arrangement” rules, fluctuations in the value of the loan in NZ dollar terms are included as either taxable gains or losses in New Zealand tax returns. For example, if you have US$1m of borrowing that translates to NZ$1.5m at the time of uplifting the loan, but is worth NZ$1.2m at the time the loan is repaid, you are deemed to make a $300,000 taxable gain. Of course you derive no real economic gain, as you used the money to buy a US asset that declined in relative value at the same time (currency wise). Unfortunately, tax law only looks at the loan side of the equation and deems you to have made a gain. That said, these rules can work in your favour if the NZ dollar weakens relative to the currency that you have borrowed in because then you are deemed to suffer a loss that you can claim for tax purposes.
In summary, don't forget about New Zealand tax implications when it comes to investing offshore, and as usual, you should seek expert advice. If you would like help from GRA with this, please see your Client Services Manager, or contact us at info@gra.co.nz, by phoning +64 9 522 7955, or by filling in our online form. We would be very pleased to assist you.
Matthew Gilligan
Director
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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