Australian Residential Rental Properties

Grange Associates Ltd - 21 February 2012

Many New Zealanders choose to invest in Australian residential rental property.  A typical investment is a Queensland apartment that is available for holiday rentals by being part of a managed pool.

The best ownership structure for such properties is either individually or through a trust.  There are pros and cons under both options, but essentially the arguments can be simplified to availability of losses for individuals and asset protection for trusts.  Generally, the use of a company is the least desirable option as the likely result is the imposition of double taxation.

For New Zealand income tax purposes all trusts are taxed in accordance with the residency of the settlor.  A settlor is deemed to include anyone that lends money to the trust for less than a market rate or chooses not to collect market interest by failing to demand it.  It also includes any person that a nominee settles a trust on behalf of, with an example being an Australian lawyer settling a trust upon the instructions of a New Zealander client.  Typically in this situation the New Zealander would act as trustee and lend money to the trust. 

Irrespective of the ownership structure, individual or trust, because the rental property is situated in Australia the income sourced from it must be returned to the Australian Tax Office.  If a taxable surplus occurs then income tax will need to be paid in Australia at the prevailing rates.  Any losses resulting will be available to be carried forward and offset against a future surplus from the property.

Then because New Zealanders are taxed on their worldwide income, whether that be as an individual, a New Zealand trust or an Australian trust with a New Zealander settlor, the rental surplus also needs to be returned on the relevant taxpayer’s New Zealand income tax return.  Again any loss will be available to be offset against a future rental surplus, or if the relevant taxpayer has other income during the year, it can be offset against that income.

It is not an automatic consequence that income tax will be paid twice on any rental surplus; once in Australia and once in New Zealand.  Normally the rental surplus will first be taxed in Australia under their tax treatments at the appropriate rate.  Then the income, modified to reflect New Zealand tax treatments, will be taxed here at the appropriate rate, but with credit being given for any income tax already assessed in Australia up to the amount of the New Zealand liability.

The major difference in calculating the taxable rental surplus in the two jurisdictions concerns depreciation of the building itself.  In Australia no depreciation on buildings is allowed on those built before 1985, whereas in New Zealand depreciation on buildings is not allowed from the 2012 income tax year.  The depreciation of chattels is similar in both countries.

Where a New Zealand investor borrows money from an Australian bank to purchase an Australian residential investment property there may be an obligation to pay NRWT (non resident withholding tax) to New Zealand’s Inland Revenue.  The analysis to determine if NRWT is necessary is a little complicated and instead of trying to reproduce it here, those that are interested are welcome to follow this link to Inland Revenue’s QB 11/01.  If NRWT is payable consideration should be given to an application for approved issuer status so AIL (approved issuer levy) can be paid at 2% instead.

When borrowing from a foreign bank another issue to be aware of concerns the accrual rules.  A consequence of the accrual rules may be that foreign exchange gains and losses on the loan will need to be included in the borrower’s New Zealand income tax return.

You also need to be aware of Australia’s capital gains tax. This tax is payable when the property is sold and the amount levied is dependant on factors such as the structure adopted, property’s location and period of ownership.

We intend that this article should only provide a limited background to this topic.  Accordingly, we strongly recommend that you obtain independent and specific professional advice before committing to the purchase of an Australian residential rental property.  The most suitable ownership structure and financing arrangements are fact specific and need to be tailored to your particular circumstances.  Please contact us before you act.

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All information is correct at the date of article publication. Please note we provide the information as a service only. Accordingly, the contents are not intended as a substitute for specific professional advice and should not be relied upon for that purpose.   

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