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Tax Issues Arising From Ownership Of Overseas Rental Property

Recently IRD issued a draft interpretation statement that provides high level summaries of tax issues for NZ-resident individuals who own overseas rental property. The tax issues are summarised as follows:

If you are a New Zealand tax resident who owns an overseas rental property, you need to be aware of the New Zealand tax issues that may arise as a result of that ownership. As a New Zealand tax resident, you may be required to pay tax in New Zealand on any income you receive from your overseas rental property. You may also be required to pay tax on the same income in the country where the property is located.

Importantly, the way you calculate the rental income from your overseas property for New Zealand tax purposes may be different from the way you calculate it for overseas tax purposes. For example, the deductions you are entitled to claim, and the balance dates used may differ. You will also need to make sure you convert the foreign currency amounts into New Zealand dollars using the correct rates for the correct dates.

In addition to paying New Zealand tax on rental income from your overseas property, you may also be required to pay New Zealand tax on any gains you make if you sell the property. This is because New Zealand’s land taxing rules can apply to overseas property owned by New Zealand tax residents in the same way they do for New Zealand property.

If you are required to pay tax on income from your overseas rental property both in New Zealand and overseas, you may be entitled to claim foreign tax credits in New Zealand for tax paid overseas.

If you have taken out a foreign currency loan to finance your overseas rental property, you may also need to apply the financial arrangements rules (FA rules) to that loan. Under the FA rules, the movement of foreign exchange rates will affect the amount of deemed interest expenditure able to be claimed, and can in some cases result in an amount of deemed income. Having a foreign currency loan from a non-resident lender, such as an overseas bank, may also mean you need to withhold non-resident withholding tax (NRWT) on the interest you pay on that loan, and pay that NRWT to Inland Revenue.

Because these issues can be complicated and the outcomes can vary depending on a person’s circumstances, you may wish to seek professional tax advice tailored to your situation.

Ismail Rasheed, lawyer specialises in Immigration and Tax Law. He has 20 years’ legal experience in New Zealand. He is a Barrister and Solicitor in New Zealand, Licenced Attorney at Law in the Maldives, and enrolled as a Legal Practitioner in New South Wales, Australia.

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