Spring 2020

Buying residential rental properties is an increasingly popular investment option for Kiwis, and this isn’t limited to property in New Zealand.

More and more Kiwis are buying apartments on the east coast.

But not everyone is aware that owning an Australian rental property brings some additional tax rules you should consider.

Taxed in both countries

As a New Zealand tax resident, the rental income you earn in Australia is taxable in both Australia and New Zealand.

This means you’ll need to file tax returns in both countries.

Generally, you should be able to claim a credit against your New Zealand tax payable on the rental income for any tax paid in Australia.

Different tax systems

Australia and New Zealand have different rules for calculating income and expenditure for tax purposes.

When you’re filing tax returns in each country, you’ll need to calculate your taxable income using the applicable rules.

For example, it may be possible to claim tax depreciation deductions in Australia, but in New Zealand you can’t claim depreciation on residential rental properties, other than for chattels.

New Zealand uses a 31 March tax year-end, while Australia has a 30 June tax year-end.

If your foreign income is less than $100,000, you can choose to include the income for the Australian tax year to 30 June in the New Zealand tax year in which that June falls.

Above this limit, you’ll need to separately calculate the income for each country based on the actual tax year-end dates.

Borrowing costs

A unique aspect of owning a foreign rental property is that if you borrow from a foreign bank to fund the purchase, you may have to account for tax on the interest.

There’s an obligation to withhold and pay to Inland Revenue an amount of Non-Resident Withholding Tax (NRWT).

The standard rate of NRWT is 15 per cent, however in some cases like Australia, the tax treaty with New Zealand reduces this to 10 per cent.

The obligation to deduct NRWT may not apply if the bank you borrow the money from has a branch in New Zealand, and many of the Australian banks do.

If you do need to deduct NRWT, the bank will usually require you to meet this cost, rather than reducing the payments to the bank.

For most borrowers, it may be preferable to register for Approved Issuer Levy, which results in the tax payable on the interest reducing to 2 per cent.

Foreign exchange

When you’re calculating your New Zealand taxable income, you’ll need to convert your Australian dollar income and expenses into New Zealand dollars.

There are options to do this on an actual transaction date, monthly, or annually, using rates approved by Inland Revenue.

If you borrow in Australian dollars, you’ll have foreign exchange gains and losses on the principal of the loan that are realised each time you make a payment.

Any gains in New Zealand dollar terms are ultimately taxable and losses are deductible.

Where you fall under certain thresholds, you can recognise gains and losses only as they are realised. Over those thresholds, it may be necessary to recognise some gains and losses on an unrealised basis each year.

When you sell

Remember, any gains you make on selling the property could be liable for tax in Australia.

You should also be aware that the ‘bright-line test’ (which triggers a form of capital gains tax) applies to properties outside New Zealand.

Under this rule, you generally have to pay tax on any gains on a rental property sold within five years of when you bought it.

But, if you’re liable to pay tax under this rule, it should be possible to offset any Australian tax paid on the gain.

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