Investment properties in Australia owned by NZ residents: application of NZ withholding tax
NZ Inland Revenue (IRD) has clarified its position on whether New Zealand residents who borrow money from Australian financial institutions to purchase residential investment properties in Australia are liable for NZ non-resident withholding tax (NRWT) on the interest payable. The updated IRD view takes account of the new Australia/New Zealand double tax agreement that came into force in March 2010, and related NZ domestic legislative amendments.
If a NZ taxpayer owns one or more residential investment properties in Australia and they have borrowed money from an Australian financial institution to purchase the property or properties, the question has arisen as to whether they have to pay NRWT on the interest paid to the Australian financial institution. Common situations include:
- the taxpayer manages the property or properties themselves (situation A); or
- a property manager in Australia manages the property or properties for the taxpayer (situation B).
Fixed establishment in NZ
NZ IRD says that, in general terms, if the Australian financial institution to which the NZ taxpayer pays interest has a branch in New Zealand, in both situations A and B above, the NZ NRWT rules will not apply to the interest because the financial institution has a fixed establishment in New Zealand.
Some Australian financial institutions that operate in New Zealand do so through subsidiaries rather than through branches. IRD says the NRWT rules will apply if the Australian financial institution from which the money was borrowed in Australia operates in New Zealand only through a subsidiary; and if the Australian financial institution to which interest is paid does not have a branch in New Zealand, the outcomes between situations A and B may differ.
No fixed establishment in NZ
If the NZ taxpayer manages the property or properties in Australia from New Zealand, they will not have a fixed establishment or a permanent establishment in Australia. IRD says the taxpayer will have to pay NRWT on the interest whether or not they are in the business of leasing.
Under situation B, IRD says if the taxpayer has more than one residential investment property in Australia, they may have a fixed establishment in Australia. If they do have a fixed establishment in Australia, then they will not have to pay NRWT on the interest.
If the taxpayer does not have a fixed establishment in Australia and they employ a property manager who (i) works as a property manager only for the taxpayer; and (ii) has and habitually exercises the authority to substantially negotiate or conclude contracts on the taxpayer's behalf, then the IRD view is that, under the DTA, the taxpayer will not have to pay NRWT on the interest.
If the property manager acts for the taxpayer in the ordinary course of their business and is able to act independently of the taxpayer, IRD considers it is likely the property manager will be an independent agent and the taxpayer will have to pay NRWT on the interest.