Aussie Resident and Capital Gains in NZ

[Owen]

I have a question about buying investment property in New Zealand and the entity that should own it to maximise the tax benefits. I have 3 choices as I see it. I can buy in my personal name, my Aussie family trust or a NZ family trust. I am an Aussie resident for tax purposes and have no additional NZ income so a LAQC is not relevant. Please feel free to correct me on any of this as I have only just started investigating it all.

Title in Personal Name: Any income I earn from a NZ investment will be taxed in NZ and I will get a credit against my tax paid here in Oz. If the reverse happens and my investment makes a loss, this loss is quarantined in NZ and offset against future earnings. Simple.

Title in Aussie Family Trust: Same. Any losses are quanrenteeined on behalf of the trust in NZ to be offset against any future NZ earnings by the trust. Any profits are taxed in NZ and are then distributed to me as a beneficiary. My personal Aussie tax would then be adjusted with the appropriate credits. Pretty simple.

Title in NZ Family Trust: Same. Any losses are quarantined in the trust to be offset against any future NZ earnings by the trust. Any profits are taxed in NZ and are then distributed to me as a beneficiary. My personal Aussie tax would then be adjusted with the appropriate credits. Not sure if I can distribute profits to Aussie trust as I haven’t asked before? Seems pretty simple but additional accounting costs.

These are all fine and manageable however the story changes when I get to capitals gains issues. Even though NZ has no capital gains tax, as all income is eventually passed through to my Aussie tax return, if I sell a property in NZ I will hit for capital gains tax here in Oz.

How can I buy and sell property in NZ without this happening? What structure can I use to achieve this? The only way I heard of so far is to create a family trust without my name anywhere in it. So create a corporate trustee (which I would do anyway) and a have NZ-based relative or very good friend as the beneficiary. I would then do all the work undercover and get gifted any profits over time. Sounds a bit dodgy to me though. What about having my Aussie trust as a beneficiary or my Aussie corporate trustee as one? Would this get around the capital gains tax issue?

Everyone talks about NZ being great with no stamp duties, no land tax and no capital gains tax but it’s not really the case for this last point if you are an Australian resident for tax purposes. Anyone with experience in this out there?

Cheers,

 

[Philby]

This thread might help if you have not come across it already
http://www.somersoft.com/forums/showthread.php?s=&postid=68189
Good luck
Oh BTW what is LAQC?

 

[Jamie]

Hi Philby,

An LAQC is a Loss Attributing Qualifying Company.

This link here explains a bit more about it.

Jamie

 

[Marc]

Try these guys - they set up our trust and have been awesome !

Plus have a looksee at their articles that you can read.

http://www.fortunemanning.co.nz/publications/trusts_articles.htm

 

[Marc]

Owen !

The other thing to remember is this when talking about CGT in NZ....

It seems that if you purchase a property and sell it without attempting to gain rent you are classed as a developer and CGT is applied to not only that sale but to all additional sales of your other investment properties !

 

[Owen]

Thanks for that tip Marc and the other links posted. I've contacted a few other in NZ and the information is flowing in.

Cheers,

 

[Neill]

Owen,

I am also keen to buy properties in NZ and have recently been looking at the same issue as you. Q: would you mind emailing me directly ([email protected]) to let me know whether you found a way to 'avoid' CGT in Australia? If you include your phone number, I can ring you to discuss further over the phone.

FYI - I went to a seminar about a month ago and someone said that the solution involved setting up a trust in NZ (presumably a foreign trust) which owned shared in a LAQC. The LAQC would then purchase properties in its own name. However, I have some queries with this advice.

I have picked up some other useful tips about NZ properties and where to invest through reading, so if we make contact, I would be happy to pass these on.

Regards, Neill

 

[Owen]

Just a follow up for this thread. Everything written above is correct about the tax relationship between NZ and Oz if an Aussie resident is to buy in NZ.

Marcs tip about trading property is an important one. If you 'buy a property, then renovate it and sell it without the intention to rent' you will be flagged as a developer/trader by the IRD (Inland Revenue Dept) and once flagged, this will apply to ALL your properties regardless of whether you rent them or not. The CGT is not a separate tax calculation like it is here though as it is really just income tax and if you trade the IRD deems you are running a business so you pay tax on earnings. Pretty simple but important to know.

A NZ LAQC is not relevant unless you are earning other income (and paying tax) in NZ. It allows you to purchase property via a separate entity (the LAQC) that is negative geared and pass through the losses to you as an individual and offset these losses against your personal income. No income in NZ, no purpose in having an LAQC. Nice idea though and maybe revelant if you do decide to trade some properties in NZ and hold others in a seperate entity.

Purchasing in NZ via an Aussie family trust if fine. All the same tax rules apply as described above and you still keep the flexibility of distribution of any profits, capital gain or otherwise. There is no need or benefit in setting up a NZ trust.

Lenders are happy loaning to an Aussie trust as long as the property is in NZ of course and they don't care where the deposit comes from. Easy money. One really important thing that I only found out as a passing comment when interviewing accountants over there is there are thin capitalisation rules in NZ to control foreign ownership of property. If a property is bought by you or the buying entity with less than 50% NZ resident ownership you can only borrow a maximum of 75% of any property and still claim the interest costs on your NZ tax return. If you borrow more then you can't claim the costs!!!! So you need a big deposit going in but at least you still don't have to pay stamp duties or land tax. The returns outside of Auckland are heaps better than here too.

I hope this helps.