The Inland Revenue Department (IRD) is actively looking for investors in overseas property markets but do not file their income in tax returns.
Such investors have been assessed for failure to deduct New Zealand non-resident withholding tax (NRWT) in respect of the interest payments to financial institutions.
This NRWT liability is applicable even if the interest payments are done from an Indian Bank located in India. NRWT rules apply to gross interest income deemed to be derived by the overseas financial institution from New Zealand.
Each case will be decided on its facts. But the following guidance could be of help.
If a New Zealand tax payer pays interest to an Indian financial institution that has a branch in New Zealand, then the NRWT rules will not apply to the interest as it would be considered that the financial institution has a fixed establishment in New Zealand.
If this financial institution has a subsidiary and not a branch, then NRWT would apply.
However, if you borrow from a New Zealand subsidiary of such a financial institution, no NRWT would be applicable, because the interest is not paid to a non-resident.
If the NRWT rules are applicable, then the taxpayer must check whether the funds have been used to carry on a property investment business in India by maintaining a fixed establishment.
If you are managing your property investment business from New Zealand without having a fixed establishment in India, then NRWT would be applicable to the taxpayer.
If the taxpayer does not have a fixed establishment in India but has appointed a property manager, NRWT rules would not apply.
However, if the property manager is appointed in the ordinary course of property manager’s business and not exclusively for the New Zealand taxpayer, then NRWT rules will apply.
Arvind (not a real name) is a New Zealand tax resident. He purchases two apartments in a high rise tower in Mumbai through finance obtained from a local Indian Bank, which does not have any branch in New Zealand. These loans are secured by mortgages.
Arvind has authorised a local professional property manager to manage the property and enter into contracts with the tenants and maintenance contractors.
As the local Indian Bank does not have a branch in New Zealand, it does not have a fixed establishment here. The local property manager is acting for Arvind in the ordinary course of his business and would be treated as an independent agent. Arvind will not be treated as having a permanent establishment in India.
Therefore, he would be obligated to deduct NRWT from the interest paid to the local bank in India and pay the NRWT to IRD in New Zealand. He will also be required to file the income tax return with the Indian Tax Authorities for the rental income derived in India and include that income in his New Zealand income tax return.
If someone has become a tax resident of New Zealand after April 1, 2006 and was a non-resident for a continuous period of at least ten years prior to becoming a New Zealand tax resident, then he or she may be entitled to a transitional resident exemption. Such investors need not deduct NRWT. They would be entitled for this exemption for four years from the end of the month in which he or she becomes a tax resident here.
If a person is liable for NRWT, then he or she may, with IRD consent, become an approved issuer and have the loan treated as a registered security. Once this is done, there would be no need to deduct NRWT at 10% but an approved issuer levy of 2% should be deducted and paid to the IRD.
Failure to deduct NRWT will attract use of money interest, late payment penalties and shortfall penalties. These range from 20% to 150%.
Real Estate investors in India as well as other countries should seek professional advice so that they are not caught by these provisions.
Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants (www.taxeperts.co.nz) Telephone (09) 2792987. The above article should be considered only as a guideline and not a specific advice. Mr Talekar absolves himself, along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.