Overseas rental properties – a tax minefield
During the course of our work with clients, we occasionally come across situations where tax issues are not well understood, and where a proactive approach to managing the tax risk can have a real positive outcome for the client.
Owning a rental property overseas is one of those areas where a seemingly simple issue can lead to tax obligations that go far beyond what most people would expect.
As well as having to return the rental income in their tax return in NZ, there are other issues including a requirement to deduct withholding tax on interest payments made to overseas banks and possible taxable income (or deductions to be claimed) from the movement in the NZD value of overseas debt. I’ll go into a bit more detail about each of these issues below, however it must be noted that each situation is different and advice should be sought for a person’s particular situation.
Many people will not be aware that New Zealand tax residents are taxable on their worldwide income. This means (unless exemptions apply, for example a temporary exemption that exists for new migrants) that rental income or losses need to be included in the person’s NZ tax return.
With the drastic reduction in interest rates that has occurred since the global financial crisis, many of these overseas rentals are in a position where they make a taxable profit.
Any taxes paid overseas on the rental income will be able to be offset against taxes payable here on the same income, to the extent that the taxes are payable here (ie overseas tax paid will not be refunded here if the rates paid overseas are higher than the rates that would be payable here).
Withholding tax on interest paid to overseas banks
Most people would not necessarily think that they would have to pay tax on interest payments that they make to banks overseas. Nevertheless, Withholding Tax is required to be paid on the interest payments that are made overseas. The rate of the withholding tax is 15% (which may be reduced under a Double Tax Agreement).
In some cases the Non Resident Withholding Tax can be opted out of by electing in to the “Approved Issuer Levy” regime. This can only be done going forward (ie it is not possible to retrospectively elect in to the regime).
Exemptions may apply here for interest payments to overseas banks that have branches in NZ (e.g. Westpac). The Reserve Bank of New Zealand maintains a list of banks with branches in NZ.
Taxable income due to movements in the NZD value of an overseas mortgage
The issue that causes the largest issue for clients that we see is the requirement to count changes in the value of the mortgage (when expressed in NZD) as taxable income (or a loss).
The New Zealand Dollar has appreciated significantly against many currencies since the global financial crisis. The most significant movement that we have seen is the recent appreciation vs the British Pound after the UK voted to leave the EU (Brexit).
Again, there are exemptions to this that may apply and thresholds below which income is not required to be returned every year (just when the mortgage is repaid).
In any event, we highly recommend getting on top of these issues if you own a rental property overseas.