Many new residents continue to own rental properties outside of New Zealand and incorrectly assume that there is no New Zealand tax filing obligation in relation to the property because they file taxes in the country where the property is located.
This is a common misunderstanding.
Once a new migrant is NZ tax resident and no longer a transitional resident (during which time all foreign sourced income other than personal services income is exempt) the person will be taxed on their worldwide income. The rental income must be calculated under New Zealand tax rules and included in the person’s taxable income. A foreign tax credit can be claimed for the overseas tax paid up to extent of the New Zealand liability.
No foreign tax credit is permitted for capital gains tax, land tax or stamp duties.
Often the person will continue to make loan interest payments on the property. A New Zealand resident who pays interest to a non-resident is required to deduct non-resident withholding tax from interest payments and pay this to the New Zealand IRD. For interest payments made to residents of countries with which New Zealand has a double tax agreement, NRWT is generally 10% of the gross interest payment. The recipient can then claim a foreign tax credit for the NRWT withheld.
The fine print of most loan agreements contain a “gross up” clause whereby no deduction of NRWT is allowed resulting in an increased interest cost.
One option is to elect to account for Approved Issuer Levy at 2% of the interest payment rather than NRWT at 10%.
