Kiwis in Australia owning NZ properties: Tax or No Tax in Australia?
There are so many Kiwi expats living in Australia. They can stay and work in Australia permanently by holding their New Zealand passport and will automatically obtain a Special Category Visa (SCV) subclass 444 at arrival.
Many Kiwis in Australia are owning NZ rental properties – May be the property was their home before moving to Australia or they wish to invest their money into their country of birth. This area of tax can be very tricky. Recently we have a client (a Kiwi family living in Australia) overpaid their tax by about AU$50,000 over the last 5 years just because their previous accountant has no understanding in this area of tax.
The 3 most common ways of holding rental properties in New Zealand are:
- Under your own name
- Under the name of a NZ Look-Through Company (LTC)
- Under the name of a NZ family trust
A New Zealand trust is very complicated when it comes with international taxation because NZ has a very unique “settlor regime”, which is very different from the rest of the world including Australia. This will be covered in PART 2.
- Under your own name
Australia is a worldwide tax country which means in general, if you are a tax resident in Australia, your New Zealand rental income is going to be taxed in Australia. The Double Tax Agreement between AU & NZ doesn’t assign the taxing right of “income from real property” to a specific country, which means both Australia and New Zealand can impose tax on your NZ rental income. However, there is a temporary tax resident exemption available. If this exemption applies, most of your overseas income will not be taxed in Australia, including foreign rental income, foreign capital gain, dividends/distributions from a foreign company or distributions from a foreign trust.
To qualify the temporary tax resident exemption, a Kiwi expat must satisfy all following requirements:
- Entered Australia using the SCV subclass 444 (i.e. New Zealand passport).
- Both you and your spouse are not an Australia PR or citizen.
- You and your spouse start residing in Australia AFTER February 2001.
You must be a temporary tax resident at any time on or after 6 April 2006. This means if any time on or after 6 April 2006 you failed to satisfy any one of the requirements above, the exemption will not apply to you, even if you have satisfied all 3 requirements later.
This exemption applies from 1st July 2006.
If you think this exemption should be applied, then you may have overpaid your tax. To correct this, you must lodge an amendment / objection to the ATO. There is a 2-year time frame for amendment so it is very important to discover the error early.
- Under the name of a Look-Through Company (LTC)
LTC is a special type of company in New Zealand. It is commonly used by Kiwis to hold their investment properties in New Zealand. There is no LTC in Australia so it will be treated just like a normal company.
Australia has Controlled Foreign Company (CFC) rule. Here is a simple example of CFC: If John is an Australian and a sole shareholder of a company outside Australia, then that company is a CFC. Being a CFC means the company’s income may be required to be attributed back to John (i.e. the shareholder). The purpose of the CFC rule is to catch people using an overseas company to shift the profit in order to avoid Australian tax. It is highly complicated so this article will not go through too much details.
Let’s assume that Leon, a Kiwi expat living in Australia, has a LTC in New Zealand earning rental income. If he is a temporary resident, then it is simple – if the LTC is not “carries on business” in Australia, then no income will be attributed because of the temporary resident exemption discussed above. If the LTC only holds NZ property for passive investment purpose, usually it won’t be considered as “carrying on business”.
But what if he is NOT a temporary resident? Clearly Leon’s LTC is a CFC under the Australian law in this case, so does the rental income earned by the LTC going to be attributed back to Leon? The simple answer is no. This is because New Zealand is a “listed” country*. Only passive income** to the extent it is “eligible designated concession income” (EDCI) will be attributed. However, the actual “dividend” distribution received from the LTC must be included in Leon’s Australian tax return as a foreign dividend.
Capital gain is an example of EDCI because New Zealand does not tax capital gain in general. Thus, even this is no dividend distribution to Leon, the capital gain earned by the LTC will be required to be attributed back to Leon’s Australian return as a CFC income.
Arguably speaking, the Australian tax law is in favor of the Kiwis. It does provide a lot of tax concessions to all Kiwis living in Australia. Unfortunately, this area of tax law is not well known across the general public (or even the professionals!) in Australia.
This area of Australian tax law is highly complicated and this article can only provide a very simple overview. If you are owning properties in New Zealand under your individual name or using a LTC, please feel free to contact us by email: firstname.lastname@example.org for more information.
* There are 7 “listed countries” under the Australian tax law: Canada, France, Germany, Japan, NZ, UK and US.
** Common examples of passive income: rental, capital gain, interest, dividend and royalty.