Migration to New Zealand is breaking records in 2015 – many of whom are Kiwis returning from long stints in Australia having acquired one or more rental properties during their time there.  So what are the tax implications of such a move?

Here is a common scenario of a returning Kiwi with rental properties in Australia managed by an Australian domiciled property management firm receiving rental income of say A$15,000 – and with no other Australian sourced income.

New Zealand and Australia are party to a Double Tax Agreement (DTA). This DTA outlines which country has the sole right to tax specific types of income. The tie-breaker test in this DTA (to settle circumstances where you are considered tax resident in both countries) states that you will be a resident where a permanent home is available to you.

Australian Obligations

The income required to be returned in an Australian income tax return is the rental income (or loss) from Australian rental properties. The tax rate on non-resident income in Australia is 32.50%. Using a total amount of Australian rental income of A$15,000, there would be tax payable in Australia of A$4,875.  Remember that Australian Capital Gains Tax will continue to apply to the eventual sale of the properties regardless of the residence of the owner.  An Australian tax agent would be required to give more detailed and specific advice – and to prepare and file the Australian tax returns.

  

New Zealand Obligations

As a resident in New Zealand for tax purposes, worldwide income of the individual must be included in the New Zealand income tax return.  However, there may be the ability to claim a credit for the tax paid in Australia. In New Zealand (using an exchange rate of 0.9597), the income to return would be NZ$15,629 – with foreign tax credits of NZ$5,079 for the amount of tax paid in Australia.

We will use a New Zealand marginal tax rate of 30% for this income. The tax payable is NZ$4,688 – but because NZ$5,079 is available as a tax credit having already been paid in Australia, there is no further tax payable on this income in New Zealand.  The rental income has now been correctly taxed in Australia – and isn’t taxed again in New Zealand. 

A couple of things to note:  1)  The calculation of income or loss relating to the Australian property must be in accordance with New Zealand tax rules; and 2)  The foreign tax credits are available only up to the amount of New Zealand tax payable on this Australian income, and cannot be used to offset income tax on other types of income such as New Zealand sourced income.  Thus in this example, NZ$391 of Australian tax credits are not able to be utilised in this country.

If you are in this situation, please do not take this article as specific advice – but give us a call at Elevate CA to discuss your specific situation so we can assist you in meeting your tax obligations properly.  Every situation involving a New Zealander returning permanently from another country is distinct and different.

Q: When is a payment tax deductible to your business but tax free in the hands of your employee?

A: When the payment is for hurt and humiliation caused by the employer.

This may seem at first glance like an opportunity for tax arbitrage – notwithstanding the high price in terms of your reputation as an employer.

The IRD has confirmed in Public Ruling BR Pub 06/05 that genuine compensation for humiliation, loss of dignity, or injury to feelings is not taxable to the employee. It matters not whether the compensation is determined by the Courts or is an out-of-court settlement agreed by the parties.   Regardless of the payments being non-taxable to the employee, they are likely to be tax deductible to the employer.

Due to this one sided tax treatment, payments for hurt and humiliation have become an area of focus for the IRD. It is well worth having some background knowledge to the tax treatment of payments to employees who have a legitimate personal grievance.

Payments for lost income, redundancy entitlements, or exit inducements are taxable and are subject to PAYE just the same as ordinary salaries and wages are. Simply reclassifying a payment as being for hurt and humiliation and getting the settlement agreement signed by an independent mediator does not make the payment non-taxable.

In order to stack up as genuine compensation for humiliation, loss of dignity, or injury to feelings – and as such be legitimately non-taxable to the employee, the parties would need to be able to demonstrate to the IRD the following: 

1. That the employee had a genuine personal grievance , and;

2. That the amount paid to the employee was reasonable based on the level of compensation awarded by the Courts in similar scenarios.

The onus for getting this right is with the employer. If the IRD were to later investigate the transaction and deem that there was no genuine personal grievance – or that the payment was excessive, they would likely seek to “gross-up” the payment to calculate the PAYE liability. As a result, the employer would be assessed for the unpaid PAYE – plus penalties and interest.

Although the employee may be highly motivated to have payments classified in a not taxable manner, the costs of getting it wrong fall entirely on the employer’s shoulders – so care must obviously be taken in this area. Because of the asymmetrical tax treatment and opportunities for abuse, payments for hurt and humiliation will likely continue to be an area of focus for the IRD.

 

Should company own the vehicle I use – or should I own it in my own name?

We often field this question. There is no one size fits all answer. The most tax efficient conclusion may differ depending on circumstances such as the value of the vehicle, the running costs, the availability for private use – and the actual private use.

I will provide two worked scenarios using a range of variables to illustrate some of the differences. In each example I’ll calculate the after tax cost for:

1. Owning the vehicle in the company; versus
2. Owning the vehicle privately and receiving a tax free reimbursement for business use.

In each of these scenarios, annual running costs of the vehicle is $8,500, depreciation on a straight line basis is 21%, the vehicle is used 80% for business and 20% privately by kilometre – and an FBT rate of 49.25% applies. 

Scenario One – A low cost vehicle ($28,750 inc GST) which is available two days per week for private use.

In company ownership, the cash cost net of tax in year one is $29,589. This reduces to $4,589 in future years. 

In private ownership, the cash cost net of tax in year one is $33,355 reducing to $4,605 in future years.

Under these circumstances, it is clearly more cost effective for the company to own the vehicle and pay FBT for the days the vehicle is available for private use.

 

Scenario Two – A higher cost vehicle ($97,750 incl. GST) which is available 7 days per week for private use.

In company ownership, the cash cost net of tax in year one is $94,092 reducing to $9,092 in future years. 

In private ownership, the cash cost net of tax tin year one is $99,109 reducing to $1,359 in future years.

Clearly under these circumstances owning the vehicle privately and receiving a tax free reimbursement of actual expenses would be the most tax efficient option.

As illustrated above, no two situations are the same.  The above examples assume a one shareholder employee situation.  However, the variables and outcome will change again with the introduction of a second, third or even fourth shareholder.  To get the best outcome you should sit down with your chartered accountant to evaluate the options.  If you would like to discuss your situation with Elevate CA we can work through your options to arrive at the most tax efficient structure for your vehicle ownership.

 

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