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NEW ZEALAND PROPERTY INVESTMENT TAXATION IMPLICATIONS OF INVESTING IN NEW ZEALAND INCOME TAXATION Introduction Resident or Non-Resident? Rates of Income Tax Personal Income Tax Rates (Rate of Tax for every $1)
Corporate Income Tax Rates
Trusts
Non-Resident Withholding Tax (NRWT) Double Tax Agreements (DTA)
These rates are subject to modification by DTA's between the New Zealand Government and a number of countries (29 at last count). There is also foreign investor tax credits that have the effect for overseas investors living in a country subject to a DTA with New Zealand of funding any NRWT on dividends. Since August 1, 1991 New Zealand borrowers have been able to apply for exemption from payment to non-residents of the withholding tax and instead pay a levy set at two percent of their interest payments. As a result of the levy payment, no New Zealand tax will be payable for the foreign lender. Otherwise NRWT is payable. There is a NRWT liability to the New Zealand Government on interest paid in respect of borrowings in relation to land including where a non-resident pays interest to a foreign bank and the loan is secured over New Zealand property. CAPITAL GAINS There is currently no capital gains tax imposed in New Zealand, but some capital gains are taxed as income. For example, tax is not payable on profits arising from real property sales unless:
Taxable income can arise if the land is acquired by an associated person of a developer or builder and sold within 10 years of acquisition. Any profit from the purchase and subsequent sale of a commercial property will ordinarily be a tax-free capital gain, though there may be a recovery of depreciation claimed as a deduction in earlier years. Local Authority rates are the only property tax, which fund water, sewage and other local body costs. Gifts of property or money other than by testamentary disposition (under a will) may result in a liability for Gift Duty. This may be more of an issue if you decide to become a permanent resident in New Zealand. GOODS AND SERVICES TAX (GST) GST is a tax on the consumption of most goods and services in New Zealand. The current standard rate of GST is 12.5%. Anyone who carries on a "taxable activity" may register with the Government as a collector of GST (please note if your gross turnover is more than $40,000 in a 12-month period you must register). Some activities are excluded from the definition of taxable activity and are therefore not liable to GST. Examples of these include working for salaries or wages, being a company director, letting a property for domestic use, financial services etc. There are no broad exemptions for food or other essential goods or services (other than domestic dwellings). GST is a consumption tax like VAT (Value Added Tax). Therefore, the final consumer bears the tax. At each stage of a transaction (e.g. producer, wholesaler, retailer) those registered business taxpayers collect GST for the Government, after calculating a credit for GST they have incurred on their purchases and pay the net amount across to the Government. While this system may appear cumbersome in reality it is a relatively simple process to administer and comply with. Export goods and services are taxable at a rate of zero percent. That is, no GST is charged but GST costs may be recovered. GST is also imposed on goods imported into New Zealand, at the customs point of entry. The Government recently announced a proposal to impose GST on imported services. See Appendix below for illustration An Example of Income Tax and GST Implications on an Individual Investing in New Zealand An overseas individual purchases a commercial rental property in New Zealand for $450,000 plus GST - ie $506,250. An apartment under a formal lease arrangement or management contract with a management company may fall within the definition of a commercial property. The annual gross rental from the property is expected to be $50,000 plus GST with expenses of $10,000 plus GST. What are the tax implications? Income Tax Income tax would be payable by an individual on the net GST exclusive income of $40,000 as follows:
This is a first and final tax in New Zealand. Tax paid in New Zealand is allowed as a credit against tax payable in respect of that New Zealand income in the particular country of residence. This provision is subject to the laws of the country in force at the time and a credit would generally only be allowed against the additional income tax arising from returning of the New Zealand net rental income in their own tax jurisdiction. GST Because the annual gross rental of $50,000 is above the compulsory GST registration level of $40,000 and the individual is not operating an exempt activity then they must register for GST with the Government. This means that GST is collected on rental income and incurred on all business expenses that include GST. On a regular basis, eg. One, two or six months, GST returns must be filed with the Government detailing the difference between GST collected on rents and GST incurred on expenses. This difference is then passed on to or refunded by the Government. A GST claim can be made on all supplies used in the businesses taxable activity that contain a GST element. In this case it would include a GST claim on the purchase of the commercial rental property (this is subject to some special conditions). This would equate to 1/9th of the GST inclusive purchase price ie. $56,250 (this equated to GST at 12.5% on $450,000). This opportunity for claiming the GST element contained in business assets may result in a significant cashflow advantage when considering investing in New Zealand. When these business assets are ultimately disposed of (or on the cessation of the taxable activity) GST will have to be returned on the disposal of the assets at 1/9th of the GST inclusive value. Please note there are special rules not discussed here such as the zero rating of a "going concern" between two GST registered parties. This may apply to the purchase of a managed apartment. Care needs to be taken (or advice sought) before entering into a contract to buy such property. Tax Issues for Intending Migrants If you wish to become a permanent resident then you will need to apply to the New Zealand Government. Tax residency is not dependent upon permanent residency and could be triggered prior to becoming a permanent resident. Prior to becoming a New Zealand tax resident there are many tax issues to consider. These include:
For further information or enquiries please contact
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Queenstown Property Limited |
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Wanaka, Arrowtown & Queenstown Real Estate Agents | New Zealand Real Estate For Sale |
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