Home > Updates > NZ tax obligations on your foreign mortgage
Did you know that if you reside in New Zealand and have an offshore mortgage, you could have New Zealand tax obligations in respect of the mortgage?
New Zealand tax residents who pay interest to an offshore lender have an obligation to withhold non-resident withholding tax (NRWT) on the interest payments and pay the NRWT to Inland Revenue.
While the NRWT is calculated on the interest paid, lenders generally include a gross-up clause in the loan agreement which requires the borrower to bear the cost of the NRWT.
The rate at which NRWT must be deducted is generally 15% but can vary depending on the country the offshore lender is tax resident in.
Alternatively, if you are not associated to the offshore lender, you can register for Approved Issuer Levy (AIL) and pay 2% AIL on the interest instead, with the NRWT rate dropping to 0%. AIL can result in a significant cost saving on sizeable mortgages.
A recent change in the tax law means that borrowers can now retrospectively register for AIL. Borrowers can backdate their registrations to 1 April 2025 if the reason they did not register earlier was due to oversight, or due to reasonable efforts to register before the first interest payment. The NRWT liability for borrowers who have NRWT obligations prior to 1 April 2025 remains.
Tax residents who have significant financial arrangements (e.g. cash deposits, loans, foreign denominated mortgages on rental properties) may be subject to tax on their unrealised foreign exchange movements on the financial arrangements if they are not a ‘cash basis person’. The financial arrangement tax rules require non-cash basis persons to account for the unrealised gains and losses which arise from their foreign denominated rental property mortgage. An unrealised gain in a tax year is taxable income, while an unrealised loss is generally deductible.
All tax residents are required to account for any realised gains or losses arising from a foreign denominated mortgage. Typically, there will be a degree of realised gain or loss when repaying any part of the mortgage principal.
If you would like to discuss your tax obligations in respect of your offshore mortgage, please reach out to one of our tax advisors or your usual Nexia advisor.
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