investing in new zealand property market for australians part 2

Master Class: Property Investing In New Zealand Part 2 Matthew Gilligan www.gra.co.nz

Ken Raiss www.chan-naylor.com.au

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Todays 12 topics

1. A quick recap on the market fundamentals, market size and historical performance (if you missed part 1).

2. The key differences between the New Zealand and Australian property markets.

3. Asset structure considerations for Australian investors.

4. How to offset after-tax losses from NZ property against Australian income tax.

5. Rules for investing in New Zealand with your SMSF.

6. How to mitigate exchange rate risk.

Todays 12 topics

7. Bank rules for financing New Zealand property investments from Australia.

8. The key risks of offshore investing in New Zealand.

9. Tax planning considerations when investing in New Zealand.

10. The support team you need in place on the ground to maximise your results.

11. Where to research, find and analyse New Zealand investment properties.

12. A live Q&A following the main presentation.

Housekeeping

Copyright

All copyright in this presentation is retained by the respective authors; including graphs, data and concepts. Nothing is to be reproduced without the written permission of Gilligan Rowe & Associates LP or Chan & Naylor Australia.

The legalese - GRA

The views and opinions expressed in this presentation are not intended to be individual advice. The views and opinions are general in nature, may not be relevant to an individual's circumstances, and constitute generic concepts only.

The views and opinions expressed are those of the individual speakers and not necessarily those of Gilligan Rowe & Associates LP, or their employees, officers, or subsidiary entities. Further any views expressed in this presentation are done so under the exemptions specified under S14 of the the Financial Advisers Act 2008 for Chartered Accountants.

Nothing contained in this presentation is endorsed by the Financial Markets Authority.  Before making any investment, insurance or other financial decisions, you should consult an Authorised Financial Adviser.

Disclaimer – Chan & Naylor

This Chan & Naylor presentation is general information and for educational purposes only. Anything you do must consider commerciality and the ATO tax avoidance legislation.

Do not rely on information, discussions or other from this presentation or workshop to make decisions. The information contained in this presentation is not exhaustive and you need to seek independent & specific advice before acting.

Seek advice from your advisors who will take your specific circumstances into account before entering any transaction or strategy. Do not implement any strategy or information from this presentation before seeking advice from your licensed financial planner.

Webinar resources

• Tonight's presenters are experts in their fields in Australia and NZ respectively. Take advantage of their services.

• Webinar is being recorded and will be made available online with the presentation slides in the next 24 hours.

• Live Q&A at the conclusion of the webinar.

Introducing ourspeakers

Introducing: Ken RaissManaging Director, Chan & Naylor• Active property investor

• Certified practicing accountant since 1985

• Specialises in teaching investors the practical aspects of property investing including feasibility studies, approaching banks and asset protection techniques

• 15 offices in Australia Help clients grow & protect their wealth from generation to generation

Introducing: Matthew Gilligan, CAGilligan Rowe & Associates

• Active property investor and developer

• 18 years experience

• NZ Property & Tax Consultant

• Tax and legal

• Structure expert

• Approx. 100 full time staffHelps GRA’s 2800 family groups

crunch property numbers

A quick recap on the NZ market fundamentals

Population size of cities is small

NZS: 2014 Estimates

Projected population growth 2011-2031

Source: GRA Data Analysis

NZ Population: main centres compared

GRA Data Analysis: NZ Stats

Auckland not making enough houses

Land prices soaring

20022012

Price of vacant land

Auckland district $100-125k $250-275k

20/25km Queen St radius $100-$125k$300-325k

Source: Core Logic

Housing stats misleading….black line has Auckland in it….

GRA Data Analysis – Core Logic Medians Post GFC to Dec 2014

Real house prices

Key Point:

Auckland has tight supply and bullet proof demand.

This reduces risk 

Property Investing in the New Zealand Property Market for Australians

Successful investing

Both locally and especially overseas considers

1. Feasibility study

2. Correct structure

3. Appropriate debt

4. Tax considerations

5. Coordinated team

Investment ownership

Ownership structure

Company X X (on death)

X X

Asset Protection

Estate Planning

Cash Flow Flexibility & Taxation

Individual X X (on death)

X X

Trust √ √ √ √

1. Dependent on your place of residence

2. Australian tax residents are subject to tax on World Wide Income

3. Australia and New Zealand are signatures to a double taxation treaty

4. NZ income taxed in Australia 5. Australian tax is credited with NZ

tax (foreign tax credit), 6. No refunds if OS tax more than

Aust. tax

Taxation

Australian Tax Resident

 Generally you are an Australian resident for tax purposes if you:

1.Have always lived in Australia or have come to Australia to live

2.Have been in Australia for more than half of the income year (unless your usual home is overseas and you don't intend to live in Australia - for example, you are a working holidaymaker), or

3.Are an overseas student enrolled in a course of study of more than six months duration.

Australian Tax Resident

4. Most people who are born in Australia and are currently living in Australia are residents for tax purposes. You may still be a resident even though you are not physically in Australia - for example, if you go overseas on an extended holiday.

5. If you have moved to Australia from overseas and intend to stay for the foreseeable future and set up connections with Australia, you may also be a resident of Australia for tax purposes.

Foreign income exemption

Primarily available to temporary residents which means world wide income not taxed in Australia.

Test for temporary resident;

• You hold a temporary visa under the Migration Act 1958

• You are not an Australian resident under the Social Security Act 1991

• Your spouse is not an Australian resident under the Social Security Act 1991

Australian taxation overview

Currently;

1. No distinction is made between domestic or foreign income

2. Domestic and foreign deductions are combined

3. Where the deductions exceed assessable and exempt income from all sources the excess will be a tax loss and can be deductible from assessable income in future year

Finance

1. Exchange rate risk reduced if loan and property in same currency

2. Loans in NZ for non residents individuals potentially easier after meeting bank lending requirements.

Claiming foreign tax credits

1.Before you calculate your net income, you must convert all foreign income deductions and foreign tax paid to Australian dollars

2.To claim a foreign income tax offset of up to $1,000, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000).

Claiming foreign tax credits

3. If you are claiming a foreign income tax offset of more than $1,000, you have to work out your foreign income tax offset limit. This may result in your tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to you.

Claiming foreign tax credits

4. Under the tax offset ordering rules, the foreign income tax offset is applied after all other non-refundable tax and non-transferable offsets. Once your tax payable has been reduced to nil, any unused foreign income tax offset is not refunded to you, nor can it be carried forward to later income years.

5. As a non-refundable tax offset, the foreign income tax offset reduces your income tax payable (including Medicare levy and Medicare levy surcharge).

New Zealand Taxation Considerations

1.Thin capitalization • Maximum loan expenses in NZ cannot exceed 60% of

market value• For Australian purposes full interest on debt deductible in

Australian tax return• In NZ given max 60% interest deductibility property owner

could pay tax and if in a loss in Australia after applying 100% none or limited foreign tax credits for NZ tax paid.

2.Capital gains tax• No CGT in NZ but in Australia 50% general discount

applies on any gains on sale with no foreign tax credits as no NZ tax paid.

New Zealand Taxation Considerations

3.Tax in NZ on company Unit trusts • No imputation Credits for NZ companies• Trusts with fixed entitlements (unit, hybrid, SMSF, property

Investor Trust®) taxed as a company• Fully discretionary trusts taxed as individuals• If using a trust with fixed entitlements where individual has

borrowed then trust would pay NZ tax and unit holder would not receive benefit as there is no look through provision

4.NZ Withholding Tax

Keep it simple

1. For investors with one investment property and or similar tax rates for family members then purchase in individual name. This would reduce annual compliance costs, potential taxation and complexity which may over ride trust benefits

2. In individual name asset protection available through Chan and Naylor Equity Bank Trust™

Keep it simple

3. For sophisticated investors and or business owners a trust structure should be considered but each case will require individual review and advise would be based on individual and specific circumstances.

Keep it simple

4. The use of Self Managed Super should also be individually reviewed given the possible adverse annual tax/cash flow consequence particularly if in Pension Stage

5. Work with advisors who understand their respective areas but just as important can work and liaise with their counterpart

Plan toSucceed

Ownership Structure

Cash Flows

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• info@chan-naylor.com.au• www.chan-

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Tax Structures In New ZealandMatthew Gilligan CA

How should you own your NZ assets ?

Property & tax author

Buy online at www.GRA.co.nz

Australian Investors:NZ tax considerations

• New Zealand has: • No capital gains tax • No stamp duty

• You still have to pay CGT on your world wide income, to the ATO in Australia

Tax Considerations

• Your tax structure needs to be driven by your local accountant in Australia

• What works in NZ can be a disaster in Australia• Companies get no CGT discount, lock

up losses• Migrating out of the wrong structure

triggers CGT• You can get trapped into the wrong

structure and exposed to tax you don’t need to pay

NZ Tax Considerations

• How are property gains taxed in NZ ?• Intention test – what was in your

mind ?• Buy to hold – capital gains not

taxable• Buy to sell – gains form part of

business income / taxable

NZ Tax Considerations

• How are property gains taxed in NZ ?• Can also be taxable even if intention to hold but later

subdivide within 10 years

• Further, can be taxable regardless of intention if sell within 10 years and land subject to change of zoning or granting of consent

• While no blanket CGT, rules are complicated with various exemptions – seek advice

Australia and NZ rule differences: rental investors• In Australia can claim capital

works deductions, which are equivalent of building depreciation

• Unable to claim building depreciation deductions in NZ – can claim depreciation on chattels though

Aussie and NZ rule differences: rental investors• In Australia can claim all interest

incurred in relation to acquisition of rental regardless of level of gearing

• In New Zealand “thin cap” rules limit interest deductions for non-resident investors to 60% gearing

New Zealand Tax Rates

• Only pay tax in New Zealand if make taxable profit • Remember effect of thin cap rules

on interest deductions at 60%

• If rental activity runs at a loss = no tax to pay and loss carries forward in NZ

• If there is a profit individuals taxed at graduated rates as follows:-

New Zealand tax rates

• Individual Income Tax Rates in NZ

• $0-$14,000 = 10.5%

• $14,001 - $48,000 = 17.5%

• $48,001 - $70,000 = 30%

• $70,001 + = 33%

• Trusts subject to flat rate of 33% on retained income – but option of allocation to individual beneficiaries to access above tax rates

Potential double tax ?

• If pay tax in New Zealand, can claim a credit for this in Australia with the right tax structure

• Companies will likely cause double tax

• Generally this means no double tax if you avoid a company as your investing entity

Tax complication

• BUT

• If profit in NZ due to “thin cap” rules and loss in Australia, then tax cost in NZ • No claim for this tax credit available

in Australia

• If NZ tax higher than Australian tax, do not get refund of the difference – watch for this on SMSF (discussed later)

New Zealand Tax Rates

• GST rate = 15%

• Important note – GST does not apply to residential rental activity

• GST does apply to “regular or continuous” activity of trading property

New Zealand Tax Rates

• How does GST work on purchase of a trading property?

• GST Rate is 15%

• Roughly 13% on retail = 15% on cost• Eg $200k + 15% GST $30k = $230k• Roughly 13% of 230k = $30k

• Unlike Australia, you get a GST input credit refund, and then pay on sale.

New Zealand Tax Rates

• Key point re: GST

• There are tricky “zero-rating” rules

• Can apply where vendor is GST registered

• Get advice if budgeting on GST claim when making offer – can be an expensive mistake

Typical Kiwi Structure Not Suitable For Aussies

100%

Bob

Property$15k losses

Mary

Look Through Company

Spouse

Salary

Home

Protect Your Home

Trust

Personal Ownership StructureBetter For Aussies

John Smith

NZ Property Business

High Income Earner

No double tax on profits

Loss flow through across jurisdictions

CGT Discount

Trading Trust StructureBetter For Aussies

InvestmentTrust

Income Split To Aussie

FamilySmith Family

Trustee Limited

NZ Lawyer / Accountant

(Shareholder)

John Smith

(Director / Shr)

NZ Property Business

John Smith

+ Spouse ?

Self managed super fund (SMSF)

• If investing in NZ via SMSF need to understand NZ tax implications – they are tricky

• SMSF likely to be taxed as a company in NZ

• This means any taxable profit is taxable at 28%

• No tax rate concession because it is a super fund in NZ

• Therefore will pay more tax in NZ than due in Australia

• Can claim a credit for NZ tax payable, but no refund

www.gra.co.nz

www.gra.co.nz/requestameeting

Tax structure meetings

• Generic discussion on NZ Tax & Property;

• Structure design and dove tailing into your Australian advisor.

• NZ accounting & tax support.

• NZ cross boarder tax specialists – most countries.

• Introduction to NZ buyers and seller’s agents for property.

• Setting up Xero & helping support Real Estate Investar.

• Contact Matthew Gilligan

• E: mg@gra.co.nz www.gra.co.nz

• NZ membership available at www.realestateinvestar.co.nz.

• Australian members can add on NZ My Valuer & My research tools for $99 month. Email david@realestateinvestar.com.au to arrange upgrade.

• Do you research. All NZ suburb performance reports are online for members.

• Build a team. Whether you are a new or experienced investor, you need a team behind you to maximise your results.

How can Real Estate Investar help in NZ?

Start today and your first

21 days are freewww.realestateinvestar.com.auwww.realestateinvestar.co.nz

Questions?

www.gra.co.nz/requestameeting www.chan-naylor.com.au