Investing in property offshore
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Articles by Matthew Gilligan
In this blog I look at the tax implications of a New Zealander investing in property offshore. While there is much coverage of the implications of investing in property in NZ, there is less commentary on offshore investment.
While many of the same rules apply, there are some additional hooks that can catch the unwary. At a commercial level offshore investment can be attractive, opening up your capital to new markets, while at the same time posing challenges from a pragmatic perspective. While acknowledging these issues, the focus of this article is the tax implications here.
Same Core Rules Apply
If you buy an investment property offshore, the first point to appreciate is that more or less the same core rules apply to that property as do to a New Zealand rental property. Income derived is assessable, and the same expenses that are deductible in relation to a New Zealand property are deductible in relation to an offshore property. This is regardless of what deductions are permitted offshore. For example, while it is possible to claim capital allowances in relation to buildings in some countries, you cannot claim building depreciation here.
Another set of rules that apply regardless are the new ring-fencing rules. A tax loss produced by residential rental property offshore is ring-fenced and only able to be offset against residential rental-related income in the future.
Another rule which applies regardless of geography is the bright-line rule. If you buy a residential property offshore and sell it within five years for a gain, the gain is taxable. By the same token, other land tax rules, such as the tainting provisions, also apply irrespective of the location of the property if owned by a New Zealand tax resident.
Double Tax
If you have a property that is producing a taxable profit, it is highly likely that you will pay tax offshore and then have to return profit here. This gives rise to the possibility of paying two lots of tax in relation to the same lot of income. If you are able to claim a credit for the tax paid offshore, you only end up paying tax in New Zealand if the tax payable here is higher. Unfortunately, getting your structure wrong can see you paying two lots of tax. Without going into this point in great detail, a conventional company often leads to double taxation because you have tax at company level offshore and then eventually have to return that income at shareholder level here, but the company does not have imputation credits to prevent double taxation.
Unexpected Issues
If you borrow funds from a non-resident lender in a foreign currency, there are a couple of potential tax issues that you may not expect. First, interest paid to a non-resident lender can be subject to non-resident withholding tax (NRWT). This often comes as a surprise because interest is of course an expense to the New Zealand-based borrower. The purpose of NRWT is to levy tax on the income of the offshore lender, but it ends up being a cost to the New Zealand-based borrower. That said, there are exemptions to NRWT. Seek advice on this.
The other unexpected tax issue arises out of the fact that fluctuations in the exchange rate will see the New Zealand dollar value of the foreign loan increase or decrease. These movements are ultimately taxable. This can see an investor face a tax liability because borrowings denominated in US dollars, for example, have dropped in value in New Zealand dollar terms. While there is no real gain, tax law deems there to be a taxable gain.
Summary
In summary, there can be commercial benefits in investing offshore and getting access to foreign markets. There will be complexity in operating in the foreign jurisdiction, but the complexity also extends to New Zealand where there are tax implications on the basis of tax residency. As always, we recommend that tax advice is sought if you are either contemplating investing offshore or currently have offshore investments and are concerned that you are not complying with the rules discussed above. You can contact us at GRA to talk about offshore investments by phoning (09) 522 7955, emailing info@gra.co.nz or by filling out our online form.
Matthew Gilligan
Managing Director and Property Services Partner
© 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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Hi Salesh, I just wanted to send you an email on behalf of GRA to say how fantastic we have found your company to date. As you know, Ben and I joined GRA a couple of months ago and have just found you so amazingly helpful in getting our new property set up correctly and sorted out. We have what I would consider a rather complicated structure as a result and it’s a fantastic feeling to know that we are getting everything done in the best way possible. We have just had approval to put a minor dwelling on the property which will make a massive difference in terms of cash flow and obviously value, something we would never have even thought of without GRA and which we are very excited about. During the buying process we attended a seminar with Matthew and from the outset thought he was fab. We therein signed up for property school and found this nothing short of fantastic. The content was relevant, up to date and comprehensive, but more importantly it was taught in a way that we could actually understand and really get value out of. I wanted to mention also, that everybody GRA have recommended to us has been just so efficient and absolute masters at what they do. A wonderful network of people that we feel very lucky to now be able to call on. From Kris Pederson and Bryan Rist who put our mortgage together to the insurance guys they then referred us to, I’m super impressed. Within GRA, Ellery has probably turned things around for us faster than I’ve ever known before, something which we appreciated so very much when it came to crunch time. She’s always a pleasure to deal with and again, we’re stoked. We’ve just settled on the property today and are about to go and get the keys. I’m pretty pumped and hence this email is probably rather excitable. So, a massive thank you to you Salesh, the partners for such a fabulous 6 weeks at property school and everyone at GRA for their help. May this be the start of our property empire. Thanks again, - A & B - July 2015
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