Finance and Taxation
When considering the purchase of any property in New Zealand it is essential that you seek expert advice before entering into an agreement.
At IQ we work with a number of local experts and are happy to make recommendations to you for finance, taxation and legal representation.
Below is some quick advice on the key Finance, Taxation and Legal considerations you need to bear in mind when transacting property in New Zealand, but you will still need to engage the services of independent professionals to guide you through the transaction process.
Finance
You are typically able to finance a proportion of your purchase through New Zealand lending institutions.
As a guide, finance is typically available for up to 60% of the value of the property you are purchasing and you can go direct to major trading banks or work with a mortgage broker who will work with you to find the best available deal.
You will need to provide a registered valuation for the property in question which we can help arrange for you via a number of local independent valuers.
You will need to provide evidence of your ability to service the loan which will typically include a combination of revenue generated from your apartment via the management company and a top up from your own discretionary income depending on the level of borrowing.
A good rule of thumb is to borrow an amount on the purchase that can be serviced by the return the property is generating, with some funds left over to account for fluctuations in returns and interest rates that may occur during the financial year.
As an example, if you were considering the purchase of an apartment valued at $1,500,000 that was delivering a 5% net return to the owner after all costs where your lending rate was 6% interest then we would recommend borrowing of 50% as a maximum:
Purchase Price $1,500,000
Annual Return (5%) $75,000
Borrowing (50%) $750,000
Annual Interest (5%) $45,000
While this is a relatively conservative scenario, New Zealand has been prone to large fluctuations in interest rates over the past decade and it is important that you invest (and borrow) with this in mind.
While we have been experiencing a relatively low cash rate and lending rates in recent years of as low as 2.5%, this is not the historic average and we have experienced rates as high as 9% in recent years.
By lending at 50% of the property’s value you will retain a good level of equity in the property and will not have to service the lending via your own discretionary income. The annual surplus can then also be used to repay equity while interest rates are low.
That said, there are tax considerations where you may prefer to borrow more funds so that the property can be negatively geared to give you tax benefits against your New Zealand taxable income. But you must be aware that any negative gearing can only be applied to New Zealand taxable income. So if this is your only investment property in New Zealand then the approach is to leverage the property to a point where it is as close to possible to a tax neutral position.
A word of warning though is that the higher the leverage, the higher the exposure should interest rates rise, your discretionary income fall or, due to local/external/global influences, the returns generated by your investment property may fall.
Typically New Zealand lending institutions will limit your borrowing in this regard to help protect your/their interests in the property which is why they will normally only lend up to 60% of the value of the property.
Bank Lending Criteria
Many buyers waste a lot of their time and energy looking and enquiring about apartments without knowing the current bank criteria, resulting in time and resources wasted in apartments that aren’t suitable for them or are way out of their budget.
There is nothing more frustrating than finding the perfect apartment only to discover that you cannot get finance because the banks lend on apartments differently from houses.
When it comes to apartments the criteria is often much more prescriptive than for residential dwellings and include limitations around minimum sizes, apartments in hotel lease agreements and leasehold apartments. These criteria are also often changing.
Our advice therefore is to talk to a top mortgage broker who can give you the most up to date advice and find you the best bank for your needs
Taxation
At present there is no Stamp Duty or Land Tax in New Zealand. But you do need to consider how long you plan on holding your investment as there are now capital gains tax implications for anyone selling an investment property by way of the Bright-Line Test introduced in 2015.
When considering the purchase of a Managed Apartment in New Zealand it is important to ensure you understand both the Income Tax and the Goods and Services (GST) implications of your investment.
Bright-Line Test
Introduced in 2015, at that stage, if you sold a property within two years of buying it, you had to pay for any capital gain as income.
You paid tax on that gain at your income tax rate. That means the tax paid can differ for each person depending on how much they already earn.
For instance, if you already pay the top tax rate because your income is above $70,000, you would then pay 33% in tax on any gains from property.
In 2018, the Bright-Line Test period was extended to 5 years while maintaining the other original policy settings.
In March 2021, the Government announced the Bright-Line period would be extended to 10 years for residential property acquired on or after March 27 2021.
What matters with the Bright-Line Test is when you bought the property, and the time that has passed to when you want to sell the property. Because of all the extensions over the years, there are varying periods.
Property owners will have to pay income tax on any capital gain if you:
- Bought your property on or after March 27 2021, and sell within the 10-year Bright-Line period
- Bought your property between March 29 2018 and March 26 2021, and sell within the 5-year Bright-Line period
- Bought your property between October 1 2015 and March 28 2018, and sold within the 2-year Bright-Line period.
Who the Bright-Line Test does not apply to?
If you bought your property prior to October 2015, you don’t need to worry – the Bright-Line Test does not apply to you.
While not exempt from the Bright-Line test, any new builds purchased after March 2021 still only have a 5-year Bright-Line period.
The Bright-Line Test intends to target short-term property investors – that’s why it doesn’t apply to your main home. That means you can buy and sell the main home you live in without having to pay tax. However, you can only have one main home. That means that if you buy a holiday home and sell it within 10 years, you’ll pay income tax on any net gain.
The Bright-Line Test also doesn’t cover inherited property. If a parent dies and leaves the property to you and your siblings and you all choose to sell it, you don’t have to pay tax on any of it.
Income Tax
When purchasing a management apartment/investment property in New Zealand you are essentially purchasing a going concern (a business) and as such you are liable to pay income tax on the profits generated by this business.
The income that is considered “taxable” is the surplus that remains once all operating costs, costs as owner, interest on borrowing and depreciation have been deducted.
The amount of taxable income is likely to be relatively low, depending on your level of borrowing, but it must be paid and we strongly advise that you engage the services of a local accountant to manage your tax accounting on your behalf.
Goods and Services Tax (GST)
There is often confusion about how to deal with GST on a property transaction. Here is a general outline of the position but beware that you should get specific legal and tax advice in these situations.
When you purchase a Managed Apartment you are, in essence, purchasing a business. As such, in order to affect settlement on this purchase you or your purchasing entity (such as a trust) must first be registered for GST. Your lawyer can provide advice on how to get yourself or your entity registered – it is a very straight-forward process.
While the purchase transaction itself is “zero rated” for GST because you are purchasing a “going concern” you will be required to pay a proportion of the GST that would have otherwise been due based on your anticipated use of the apartment as a proportion of the overall use the apartment has in a given calendar year. This is a one off apartment which is then adjusted on an annual basis according to changes in your personal use and the hotel’s overall commercial use.
For example, If you purchased an apartment for NZ$1,500,000 (plus GST if any) and anticipated using the apartment for 20 days each year and the occupancy achieved by the management company for the apartment was an additional 280 days per year, your GST calculation would be as follows:
Owner’s Use 20 days
Visitor Use 280 Days
Total Use 300 days
GST Proportion 20 / 300 = 6.67%
Total GST Payable 6.67% of NZ$1,500,000 x 15% (GST)
NZ$15,000
Click here for additional GST advice, but as with all things finance and tax related we strongly urge you to seek professional independent advice from the relevant specialists before you enter into any agreement for the sale or purchase of your property.