Stamp Duty and Tax Considerations when buying Australian Investment Properties
With the Gold Coast and Brisbane entering the growth cycle (and some forecasting 17-25% growth over the next 3 years) and brand new homes and apartments available for under $500,000, now looks like a great time to buy an Australian Investment property.
However, New Zealand investors need to be aware of various financial considerations, especially relating to unfamiliar tax laws, when buying Australian Investment Property.
Stamp duty is a tax on written documents (‘instruments’) and on certain transactions. It is imposed by state and territory governments. It can vary depending on the state or territory.
From 1 October 2016 a 3% stamp duty surcharge, also known as AFAD (Additional Foreign Acquirer Duty), applies to the purchase of Queensland Property.
This applies when:
- You’re a foreign citizen or temporary resident (including a 457 visa holder).
- You’re buying residential property in the state of Queensland. The surcharge doesn’t apply to commercial property.
- You’re an Australian citizen, permanent resident or a New Zealand citizen on a Special Category Visa (subclass 444) and you are not in the country at the time of the contract exchange.
- You’re applying with a partner that doesn’t have Australian citizenship, PR or the special NZ visa, in which case they will have to pay stamp duty but only on their portion.
- Please refer to the QLD Office of State Revenue website for more information.
This doesn’t apply when:
- You’re an Australian citizen, permanent resident or a 444 visa holder and in the country at the time of contract exchange.
- You’re buying the property in the name of the partner that is either an Australian citizen, permanent resident or 444 visa holder.
- If you’re currently a temporary resident and not married to an Australian citizen, consider buying in a state that doesn’t apply extra stamp duty or wait until you become a permanent resident.
If you need to borrow money, we recommend that you include the stamp duty figure in the overall mortgage. Whilst mortgage interest is deductible, the actual stamp duty is not. It is treated as a capital expense for tax purposes.
Below are some of the tax- structuring issues that arise out of a New Zealand tax resident purchasing Australian investment property. We will assume that the investor already has a New Zealand Look-Through Company [LTC] set up. The following covers some of the most frequently asked tax and tax structuring issues.
Where do I pay tax on the rental income I receive from my Australian Investment Property?
Tax Returns in Both Countries…
Because the rental income is earned from an Australian source, you must complete an Australian tax return. However, as a New Zealand resident, you need to complete a tax return in New Zealand as well.
While having to do tax returns for the rental income and losses on your Australian Investment Property in both Australia and New Zealand may seem like a disadvantage, in a situation where you have tax losses, it can actually work in your favour. You may not actually need to pay need to pay tax in both countries.
One key difference between New Zealand and Australian tax rules is in the depreciation of buildings. In Australia, on buildings constructed after 15 Sept 1985, this is at 2.5% (straight line). In New Zealand you cannot claim depreciation on buildings. Australia, like New Zealand allows allow for depreciation of chattels via chattel valuations.
Your Australian Investment property may run at a tax loss anyway. And if you do pay tax in Australia, then you can generally claim a credit on your New Zealand tax, up to the amount of tax that is payable in New Zealand.
Furthermore, the profit or loss on your Australian investment property – for the purposes of your New Zealand tax return – is assessed as if the property was subject to New Zealand tax rules. i.e. when you do your NZ Tax return, the New Zealand rules, including the New Zealand depreciation rates, apply. In the case of your Australian tax return, you do the same calculations but you use Australian tax rules.
So the rental losses from an Australian Investment property are treated in exactly the same way as if the property was in New Zealand. Just as a New Zealand property running at a loss will reduce tax payable on other income – so losses on an Australian property are available to offset against other taxable income in New Zealand. (Note that the Property needs to be owned within an appropriate structure.)
This ‘double dipping’ situation arises because the losses are returned in Australia as well. Assuming you have no other income in Australia, these losses accumulate and carry forward. So they are then available to offset future capital gains tax in Australia.
Note: The New Zealand tax year ends 31 March, whilst the Australian tax year ends 30 June.
How does Australian Capital Gains Tax work?
Australian Capital Gains tax applies on the sale of investment properties. Because there are different tax rates and also different regulations, the level of tax you pay depends on the structure via which you purchase the property.
Generally, the best options when purchasing an Australian Investment property are to buy it personally or via a Trust. Both have advantages and drawbacks. In general, personal ownership is preferable from a tax perspective as, at least initially, it will afford the investor the opportunity to access potential losses from the rental investment and offset those losses against salaries or other personal income.
Setting up a company to purchase the rental property is the least desirable option for investing offshore due to added complexity, the possibility of double taxation, and the inability to accrue tax loss benefits against capital gains tax. However, this is not desirable from an asset protection perspective.
If asset protection is a priority, you may want to purchase the property via a Trust. However this would mean you could be bound by Australian rules regarding the taxation of Trusts. This a specialist area and, as such, we strongly recommend that you seek the advice of an Australian Accountant on the tax implications of purchasing a property via a Trust, before actually doing so.
Borrowing Money in Australia.
With higher loan to value ratio requirements in New Zealand making property increasingly hard to finance, borrowing money in Australia may be a good option. Also, Australian finance rates are often lower than in NZ.
What should I look out for when borrowing in Australian dollars?
There are two key implications that you should be aware of:
- The possible application of Non-Resident Withholding Tax (NRWT)
Where a New Zealand resident pays interest to a non-resident lender, the interest is subject to non-resident withholding tax [NRWT]. With respect to borrowings from an Australian bank, NRWT applies at a rate of 10%. Although NRWT is directed at taxing the non-resident that is deriving the New Zealand-sourced income, it is inevitable that it is the New Zealand investor who bears the cost.
There are three exemptions from NRWT that can apply.
- Where a New Zealand taxpayer borrows from certain banks that operate in both New Zealand and Australia, of which there are many, these “approved banks” are under no obligation to deduct NRWT.
- You can apply for approved issuer status and pay a 2% approved issuer levy instead of NRWT.
- You could borrow from a New Zealand bank, so that NRWT does not apply at all.
Where you borrow from a foreign bank in foreign dollars, the loan will be classed as a financial arrangement for New Zealand tax purposes, meaning that foreign exchange gains and losses in respect of the loan are included in the taxpayer’s New Zealand tax return.
There are differences in how this is returned depending on how the investor invests and what assets they have. In general, individual investors only have to account for this on the maturity of the arrangement rather than each year (provided they qualify for the cash basis person exemption).
Do I need Foreign Investment Review Board (FIRB) approval?
If a foreign person wishes to invest in Australia, then approval is needed from FIRB. However, New Zealand citizens are exempt from getting this approval.
Please note that this exemption does not extend to Trusts or Companies. Thus, you will not need approval if you purchase properties in Australia as an individual but you will need approval if you purchase the property under an entity. Furthermore, FIRB will only approve purchases of a new property or a property that you intend to increase the number of dwellings on.
There are a number of issues to consider for a New Zealand Tax resident purchasing investment property in Australia.
- Will you be borrowing in Australia, and if so, what do you need to do to avoid NRWT in NZ?
- Will you be negative for tax on the investment (i.e. running at a loss), and if so, will your structure proposed allow you to access the loss?
- Will you be able to offset your foreign loss against your Capital Gains Tax liability?
- Have you dealt with the accrual rules issues that arise cross border?
- Does your structure avoid the possibility of double tax on income arising from cross border investment?
We strongly recommend that you check with your Tax Expert and Lawyer when it comes to buying Australian Investment Property. Unfortunately, whether intentionally or not, Australian rules and Tax laws affecting New Zealanders change from time to time, so it’s important that you obtain the latest advice.