Aussie property a taxing affair
Australian property syndicates are attracting increasing interest from New Zealand investors, but they should carefully consider the tax implications of investing in the lucky country, before parting with their money.
To get an idea of the sort of issues that are involved, the Fairfax Business Bureau asked Aaron Quintal, a tax partner with accounting firm Ernst & Young and the leader of its Tax Policy Group, to run a tax ruler over the latest Australian syndicate to be offered to New Zealand investors, Trilogy's Cheltenham syndicate.
The Trilogy investment is structured as an Australian unit trust, which is covered by the Managed Investment Trust Scheme in Australia, Quintal said.
That meant the trust itself would not pay tax in Australia because it was regarded as a "look through" entity, which meant each investor was taxed on their proportionate share of the trust's net revenue.
If an investor put A$100,000 into the Cheltenham syndicate and it paid its forecast return of 8.75 per cent, they would receive A$8750 in income for the year.
The syndicate would deduct Australian withholding tax at 15 per cent (A$1312.50) from its distribution payments to the investor. The investor would receive a tax credit in this country for the Australian withholding tax deduction.
In this country, it's likely the investor's taxable income from the syndicate would be assessed at 5 per cent of the total amount invested, ie A$5000.
At the top tax rate of 33 per cent, that would mean the investor's tax bill in this country would be A$1650, less the A$1312.50 Australian withholding tax deduction, leaving A$337.50 to pay to the New Zealand Government.
From the A$8750 in distribution income, the investor would be left with A$7100 after tax.
So how would that compare to investing in a New Zealand syndicate which also provided a return of 8.75 per cent?
Quintal said if the New Zealand syndicate was structured as a PIE scheme with a tax rate of 28 per cent, its distributions on a $100,000 investment would be $8750, less 28 per cent tax of $2450, leaving $6300 for the investor.
That meant the investor would receive a net return of 7.1 per cent from the Australian syndicate, compared with just 6.3 per cent from the New Zealand syndicate, giving the Australian option an advantage.
However, it was not a free lunch, Quintal warned, because Australia has a capital gains tax, while New Zealand does not.
That meant the investor would likely lose a slice of any capital gains they made from the Australian scheme when it was wound up.
So it appears to be a trade off between receiving a bit more net income during the life of the Australian syndicate, but getting a bit less back at the end.
Quintal described Australia's capital gains tax regulations as "horribly complicated," so it's important that anyone considering investing into Australian schemes gets professional advice from someone with specific knowledge of its tax system.
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