The real estate sector in India is attracting huge investments, with banks giving loans to builders and financial institutions floating real estate funds.
The Indian property market offers immense potential in the commercial, residential, retail, industrial, hospitality and healthcare sectors. The demand for property continues to surge with changing demographics, increasing purchasing power, high propensity of financial institutions to lend and favourable Government policies.
Most Indians migrating to New Zealand would have property in India. Even after settling here, there are many who would like to invest in a real estate in India.
Properties could be purchased with loans from financial institutions in India or New Zealand.
It is important to ascertain at the outset whether investment in real estate would incur a tax loss or tax profit in New Zealand.
The following structures could be used.
NZ Resident Firms
A New Zealand Resident Company purchasing a property in India would be required to file an income tax return disclosing the rental income and the expenses incurred to earn that rental income. The applicable Indian income tax should be paid in India. The Company can claim tax credits for the taxes paid in India in New Zealand.
These tax credits can be offset against the tax liability in New Zealand.
It is important to know that New Zealand’s Inland Revenue Department (IRD) would not allow claims for Capital Gains Tax paid in India.
New Zealand investors can also examine the advantages of a ‘Look Through Company (LTC), which will become effective from April 1, 2011. LTC is an ordinary Limited Liability Company, which can be used as an alternative to a Limited Partnership or Joint Venture Company. LTC will allow shareholders to claim tax losses against their other taxable income.
Indian Resident Firms
A New Zealand resident can invest in a company incorporated in India by becoming a shareholder. The Indian company would file its income tax return in India declaring the rental income and expenses incurred to obtain that rental income and pay income tax in India. The revenue reserves of such a company, when declared, as a dividend to the New Zealand shareholder would attract Non-Resident Withholding Tax (NRWT) payable in India. The New Zealand tax resident would be liable to an additional income tax on that dividend income in New Zealand.
Partnerships and Individuals
A New Zealand resident can purchase a property in an individual capacity or in Partnership/Limited Partnership with other investors either in New Zealand or India. In such a case, the taxpayer must file their individual income tax returns in India as well in New Zealand, showing rental income and the expenses incurred in deriving that income. Tax Credits will be available to the investor in New Zealand (not Capital Gains Tax).
Trusts
A New Zealand taxpayer can invest in a property in India through a Trust. This vehicle provides flexibility and other tax benefits in New Zealand. Income from the rental activity in India can be transferred to the beneficiaries of the Trust, who could be taxed at their marginal tax rates. Further, the underlying assets and properties can be left for future generations. The Trust would be liable for income tax in India only on the rental income generated in India and will get Tax Credits in New Zealand.
While filing the Income Tax Return in New Zealand for all the above entities, there is a need to disclose the rental income and rental expenses in New Zealand currency. Income earned in India must confirm to the New Zealand Income Tax legislation.
New Zealand residents investing in Indian assets in New Zealand dollars or borrowing in Indian Rupees should be aware of the exchange risks associated with such transactions. Any exchange gain or loss arising on the Indian Rupee must be included in the New Zealand taxpayers Income Tax Return, unless any exemption is applicable under New Zealand Income Tax Act 2007.
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Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants (www.taxeperts.co.nz), with offices at Level 1, 208 Great South Road, Papatoetoe, Auckland. 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.
