Inland Revenue’s Interpretation Statements on overseas residential rental properties finalised

By Nick Cooke & Stephen Walker
 

You may recall our previous article in the May 2020 edition of Tax Alert outlining some of the main tax issues arising from the ownership of overseas residential rental properties. Inland Revenue has finalised its commentary on these issues which apply from 3 July 2020. Following feedback from across the industry, we have summarised below the key changes Inland Revenue incorporated into the final documents.

Conversion of foreign currency into New Zealand dollars

Inland Revenue initially suggested in their draft Interpretation Statements that if you chose the ‘monthly’ or ‘annual’ method to convert foreign denominated income or expenditure to New Zealand dollars, you could not convert other items using the spot rate at the time of payment. However, Inland Revenue has now reversed its view and instead is allowing the ‘monthly’ or ‘annual’ conversion method to be used in conjunction with the actual spot rate amounts, the latter being used for specific one-off payments. For example, if you paid foreign tax and converted the amount to New Zealand dollars using the spot rate on the day it was paid, you can use this converted amount. Similarly, if you used a New Zealand credit card to pay an overseas rental expense, you may use the New Zealand dollar amount charged to your credit card. The ‘monthly’ or ‘annual’ method should then be used to convert the income and ongoing monthly expenses into New Zealand dollars for all income and expenses where the spot rate conversion has not been used.

Note that in future years, you must continue to use the spot rate conversion for the category of expenses for which you used it in the first year, maintaining consistency in the conversion method applied to the various income and expenditure types over time.

Deduction for the cost of low-value items

Unsurprisingly, Inland Revenue has inserted a section clarifying that a deduction is available for the cost of ‘low-value items’ in the year they are purchased. A ‘low value item’ is a depreciable item with a cost equal to or less than the threshold amount.

This section has no doubt been inserted off the back of the recent announcements that the low-value asset threshold has been temporarily increased from $500 to $5,000 (for assets purchased between 17 March 2020 and 16 March 2021) and permanently increased thereafter to $1,000 (for assets purchased from 17 March 2021). As background, the low-value asset threshold had remained at $500 since 2005, however a change to this threshold was announced as part of a number of incentives included within the Governments’ COVID-19 business continuity package. This is of course a welcome incentive for many taxpayers that is equally available for owners of overseas residential rental properties.

Note that it may be necessary to recognise depreciation recovery income if a low-value item is sold or applied for private purposes. If the asset is sold, the entire sale proceeds are assessable income in the year in which the asset is sold. If the asset becomes a private asset, the market value of the asset when it is first used privately becomes assessable income.

Non-resident withholding Tax (NRWT)

Inland Revenue expanded on their comments in relation to NRWT obligations arising from overseas residential rental property ownership, providing additional clarity for taxpayers.

First, the NRWT rules do not ordinarily apply to an individual who uses a loan to carry on a ‘business’ outside New Zealand through a fixed establishment outside New Zealand. For these purposes, it is noted that an individual who owns one overseas residential rental property would not ordinarily be considered to be operating a business, although there are many factors to consider before drawing a conclusion.

Second, it is the Inland Revenue’s position that an individual may have to gross-up payments to the non-resident lender to account for the NRWT payable to Inland Revenue where the lender will not bear the cost. This has been illustrated by Inland Revenue with the following example:

For an interest payment of AUD 2,000 subject to NRWT at 10%, the gross amount of interest would be AUD 2,222, calculated as AUD 2,000 x (100/90) = AUD 2,222. The amount of NRWT payable to Inland Revenue would then be AUD 222.22 (10% of AUD 2,222).

And finally, it has been confirmed that you must electronically report the amount of interest and the lender you pay it to by the 20th of the month following the month in which you pay the interest.

Note that instead of withholding NRWT, there is the ability to request approval from Inland Revenue to pay a 2% approved issuer levy (AIL) instead of NRWT. We would encourage affected individuals to consider this as it cannot be done retrospectively.

Require further information?

If you need any further information or assistance, we recommend you contact your regular Deloitte advisor.