Tax On Australian Investments 09 Dec 2011

Investing in Australia from a New Zealand Tax Law Perspective

In New Zealand, we love investing in property. With interest rates down and the share market looking shaky, some may think that now is the time to snap up a cheap investment property in the Gold Coast.

Beware! If this is not done correctly, an effective tax rate of just under 60% may be faced. This article investigates some common tax issues Kiwi investors may face when investing in Australia.

Where a New Zealand investor buys property in Australia, the investor has to be aware that Australia has some taxes that are not applicable in New Zealand.

Stamp Duty - This is often payable by the purchaser of property and can range from 1.25% to 7%.

Land Tax - This may range from 0% to 3.7% per annum.

Capital Gains Tax - If the property is sold at a capital gain, the gain will be taxed at the normal Australian income tax rates that can vary from 29% to 45% depending on the income earned.

Income Tax - Income tax is payable on any rental income produced by the investment.  Expenses can be claimed, and an Australian tax return will need to be filed. Generally speaking, if the investment is funded with no more than three parts debt and one part equity, an interest deduction can be claimed.  For example, if the investment is 90% debt funded and 10% equity funded there may be restrictions on the amount of interest deduction that can be claimed.

GST - The rules are similar to New Zealand, and generally speaking no GST will be charged.  In addition, if the property is being rented out for domestic housing purposes no GST is charged and neither is registration required.

There may be other Australian tax issues that could arise.

Investment Structures
From a business perspective Kiwis will have to decide how they want to structure their investment.  The following methods may be contemplated.

Investing directly
This could be the best option open to Kiwis, if they can live with the lack of limited liability.  Australian rental income will be taxable in New Zealand and Australia.  However New Zealand will give a credit for the tax paid in Australia, as long as the tax paid is similar to New Zealand tax.  If Kiwis take out an Australian dollar loan, they should be aware that the financial arrangement rules might apply to any exchange gain.  Also, Kiwis will be required to withhold Non Resident Withholding Tax on interest paid.  There may be ways to mitigate this, and it is essential that good advice is taken before the loan is entered into.

Similar advantages may also be available where limited partnerships are used.

Using a company
This may not be the best option from a tax perspective.  Because of the interaction of the Australian and New Zealand tax rules investors could face tax of just under 60%, and might even be taxed twice on capital gains.

Property investment funds
This may be the simplest investment from a tax perspective.  If the fund is listed on the ASX it is likely that investors will only pay tax on dividends that are distributed from the fund.  However, even this option is not as simple as it seems.  It is difficult to find property funds that meet the criteria for dividend only taxation in New Zealand.

From a tax perspective it is not straightforward to make investments overseas, and investing in Australia is no exception.  If you are willing to live with unlimited liability, then it is possible that investing directly is the best option for you.  Alternatively, a limited partnership may give you all that is required.  However, this comes with significant compliance costs. The simplest type of investment from a tax perspective in Australian property is through a property fund listed on the Australian Stock Exchange that meets all the requirements for dividend only taxation.  Unfortunately, it may be hard to find an Australian listed property fund that meets the criteria.

Parry Field Lawyers provide legal advice on a range of tax matters and are able to assist you with any PIE tax questions or income tax and GST questions that you might have. Please contact Kris Morrison at Parry Field's Christchurch office (348 8480) for help with tax matters.

Please note that this article is not intended to be legal or investment advice, and is only intended as a general guide. Reliance should not be placed on this article where any specific issues are concerned.