OPINION: In my last article I discussed the upcoming changes to the law in Australia to complete the arrangement between our two countries to allow transfers of superannuation fund balances across the Tasman, writes Craig Macalister in Taxing Times.
This is hoped to be completed in July 2013.
As stated, given recent articles appearing in New Zealand on Australian property syndicate investments, I thought it appropriate to highlight the tax issues associated with investing in Australian property syndicates as there are some tax risks to be aware of.
One article on an Australian property syndicate noted the equivalent New Zealand offerings may find themselves under pressure from Australian property syndicates given the extra features some of these funds are now offering. While the article did advise people to consider the tax rules, it didn't mention what the tax rules were. This is disappointing as once an investment of this nature is made outside New Zealand, the tax rules can differ materially from what you anticipate from the equivalent New Zealand investment.
So what is the key tax issue that you need to be aware of with Australian property syndicates? In short, the tax risk is that you may end up paying tax on a deemed income each year equal to 5 per cent of the market value of your investment in the Australian property syndicate.
So how does this result come about? This result could arise because in most cases a property syndicate will be a unitised investment vehicle: that is, investors will be offered units and not shares. This being the case, the syndicate is likely to fall within the definition of a unit trust for New Zealand tax purposes. This definition is very wide and likely to catch Australian property syndicates, including those registered as an Australian managed investment trust or scheme. If you are in doubt about the nature of the investment you should be able to establish this from the fund's product disclosure statement.
So what does this mean? In New Zealand, unit trusts are deemed to be companies for tax purposes, unit holders are deemed to be shareholders and units deemed to be shares. Given this, what this means is that an interest in an Australian unitised investment is regarded as an investment in a foreign company as far as New Zealand's tax law is concerned.
The significance of this is that an investment in a company not resident in New Zealand, such as an Australian unit trust, may well constitute an interest in a foreign investment fund (FIF) if the person's investments in all foreign companies (including foreign superannuation - but that is another story) cost more than $50,000 and no exemption applies.
For many, a discussion on FIFs will not be a topic you want to read about in your weekend. However, suffice to say that interests in FIFs are taxed at 5 per cent of the market value, with no tax paid on any dividend received.
That is, 5 per cent of the market value of the investment is regarded as taxable income each year the investment is held. This is tax risk that investors need to understand before embarking on the investment.
On the other hand, if the total of a person's FIF interests cost less than $50,000, or an exemption applies, then (leaving aside differences with currency and imputation) they remain taxed under the ordinary rules in much the same way as you would expect if the investment was in a New Zealand company. That is, tax is paid on any dividend income and not at a flat rate of 5 per cent of market value.
Interests in Australian companies that are listed on the ASX All Ords, ASX 200 and the ASX leaders are exempt from the FIF rules if the company is listed on one of these exchanges at the start of a person's income year. To help establish this, Inland Revenue publishes a list that can be found on its website. Simply key IR 871 into its search facility.
It is not uncommon for people to think that the Australian listed company exemption extends to other types of Australian investments. In many instances Australian property syndicates will not be listed on the exempt ASX list and will not get the benefit of this exemption.
Some exemptions from our FIF rules for Australian unit trusts are available, but these are limited to unit trusts that distribute a certain percentage of profit or have a certain turnover of equities. Property syndicates are unlikely to meet these exemptions. If they did, I would expect to find this information in the fund's product disclosure statement.
In my view, when considering investments, especially cross-border investment, the tax costs should always be understood and weighed up alongside the other merits of the investment. With Australian investments caught within the FIF rules, the tax cost could be a deemed income of 5 per cent on the investment's market value.
» Craig Macalister is tax principal at accounting firm WHK. He can be contacted on 03 211 3355.
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