Transitional tax residents
Question from Zoe updated on 10th October 2016:
I migrated from the UK last year and became a New Zealand tax resident. I have a rental property in the UK. The UK rental property makes a loss (around NZ$4,000). I have heard that new migrants have four years' exemption for their overseas income. My question is that my overseas rental property is making loss, if I don't apply this four years exemption, can I claim the UK rental loss to offset my New Zealand income to reduce income tax liability here?
Our expert Mark Withers responded:
It is optional to apply the four year transitional residents exemption. However, before opting to include the UK rental income you need to consider some wider issues.
New Zealand has a Non Resident Withholding Tax (NRWT) regime which requires you to withhold a 10% withholding tax on interest paid to a foreign lender. This is because New Zealand gives you a deduction for the foreign interest expense that will reduce your tax here, but does not get to tax the profit the UK lender makes from your loan. If you choose to declare the foreign income from the point where you became New Zealland tax resident you must also comply with the NRWT regime. This would likely mean you now have arrears of NRWT.
An alternative to the NRWT regime exists through the Approved Issuer Levy (AIL) regime. This is a full and final tax of 2% on the NZ dollar equivalent to the interest paid to the UK lender. It is generally cheaper to pay the AIL than to comply with the NRWT regime but the regime is concessionary. This means that you must clear any arrears of NRWT before IRD will grant you approved issuer levy status for the foreign loan.
You should also consider the impact that foreign exchange variations may have on your loss position. The foreign debt instrument when expressed in NZ dollars can derive a profit if, for example, the kiwi dollar strengthens or the pound weakens resulting in a decrease in the UK debt when expressed in kiwi dollars. Specific rules govern whether this forex variation must be returned annually or, alternatively, when the foreign debt is repaid or refinanced. Suffice to say, it can introduce a wild card into your New Zealand tax affairs that could undermine your assumption that you are deriving a loss.
The point of the transitional residents exemption is to give you four years to consider how you wish to arrange your affairs before having to expose your world wide income earning assets to our tax regime. I'd recommend you seek advice on all the potential impacts of retaining the property before you make any decisions, even a decision to retain it. Certainly look at all aspects before deciding not to take advantage of the exemption.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.