Tax benefits for foreign investors in NZ

In 2006 the NZ government made changes to the New Zealand’s income tax code which make immigrating or resettling in NZ particularly attractive for foreigners. New residents will be able to have an exemption on all foreign earnings for four years. This does not strike me as a particularly sensible law because the recession will last 4 years, so people might be prone to just leave the country in 4 years. But hell - who doesn't love a tax break!

New immigrants to New Zealand qualify for the automatic tax exemption on their individual overseas income under the Taxation Act 2006. The tax exemption is targeted to encourage prospective migrants to consider New Zealand as a viable and competitive place to live and work. The exemption also applies to returning New Zealanders who have not been resident for tax purposes for at least 10 years before their arrival.

It operates to exempt all “transitional residents” from New Zealand tax on their foreign-sourced income by treating it as being derived by a non-resident. A person will be deemed a transitional resident if on or after April 1, 2006:
1. They have a permanent abode in New Zealand, and
2. Immediately before acquiring that permanent abode, they were continuously non-resident for at least 10 years, and
3. They have not previously been a transitional resident.

It is possible for a person who has visited New Zealand before acquiring a permanent abode – for example, to attend interviews or to look for housing – and who would otherwise be deemed resident in New Zealand (because they had been in the country for more than a total of 183 days in any 12-month period) to benefit from the exemption.

The transitional resident status will last for four years, ending on the last day of the 48th month after the month in which the person acquired a permanent abode in New Zealand; or the day the person ceases to reside in New Zealand. After expiry of this period, the person is treated as a resident, and their foreign-sourced income becomes liable to income tax in New Zealand.

The only types of foreign income not tax exempt in New Zealand are those derived from overseas employment performed while receiving the exemption, and business income relating to services performed offshore. All other foreign-sourced amounts (including interest, dividends, and employment and bonus income from previous employment) derived by the transitional resident are exempt.

The new legislation also provides that, where a settlor of a foreign trust becomes a transitional resident in New Zealand, they or any beneficiary or trustee of the trust will now have up to five years to elect for the foreign trust to become a qualifying trust. A foreign trust means that no settlor is resident in New Zealand from when the trust is settled until a distribution is made. A foreign trust is not required to pay New Zealand tax on its foreign-sourced income. If the election is not made, the foreign trust becomes a non-qualifying trust, with distributions of accumulated income or capital derived taxed at a penal rate of 45 percent. Previously, if a settlor of a foreign trust became resident in New Zealand, any of the settlor, trustee or beneficiary had only one year to elect to convert the foreign trust into a qualifying trust.

This tax concession makes 'sleepy NZ' a great place to hang out for the next 4 years of the recession. For more information refer to our property report.

Australian Currency update for foreclosed property

A reader recentlyasked me some questions on the foreclosed property market in Japan.
I want to ask questions – but first I want people to buy the book. There are several reasons:
1. I invested 3-4 months into each book, so it would be nice to get some reward/return for my efforts
2. People have a habit of asking questions which are answered in the book – if only they bought it and read it before asking me.

This particular reader did however ask a question which I would like to offer an update. He is an Australian, so it relates to the strength of the $A against the Yen.

I would suggest that my forecast in the book remains basically the same, though there is one factor which will have an impact since I revised the book (2nd edition) in November 2008. That issue is the recent decision by the Chinese government to buy and stockpile commodities. Relatively stronger commodity prices, plus capital developments like LNG terminals (Gladstone & Far North) will likely result in stronger than otherwise capital inflows into Australia. I discussed this in my forex blog, however the decision by the Chinese government to buy and stockpile commodities is new, and unprecedented for the Chinese.
Understand that the Japanese government actually stockpiles strategic commodities for emergency provisions, but in the case of the Chinese, they are doing it because they fear an erosion of the USD which they were inclined to hold by way of US treasuries before. I did expect them to buy gold, but in hindsight, commodities makes more sense. The implication is that commodity price cycle will be shallower and longer. By implication we can expect the AUD currency against the USD to be stronger than otherwise, but the trough to be wider; though of course that depends on how China manages the commodities inventory. The implications for the AUD-JPY are basically the same, as the AUD is closely linked to global economic growth.
You might ask – will other governments follow the Chinese action and buy commodities? I could envisage some countries following suit, e.g. Vietnam, but not so many because of the costs associated with doing it. It’s cheaper to hold treasuries for most countries. China is different because it probably has a lot of spare warehousing, not to mention cheap land in rural areas. I would expect some govt officials to pilfer some of these reserves. Great recipe for corruption.

Japan remains a great place to buy foreclosed property. Some readers are buying inner city properties. I personally would wait a little longer before buying in central city areas. It makes more sense to buy in rural or suburban areas since these areas never had the price rises experienced in the city. Some of you wouldn't lower yourself to live outside Tokyo-23, in which case it makes more sense to buy an investment property in outer areas, and rent it or live in it another 6-12 months. The Japanese economy is contracting faster than most, so incomes are going to fall. In the city asset prices will as well. Some of you are excited...I know the feeling. But good judgement demands buying when things are worst. People are not feeling any pain yet, in part because of the lagging effects, and in part because of the central bank stimulus. The lower interest rates will mean nothing for years. That is because in the short term banks won't be lending, and in the long term because there will be inflation keeping interest rates higher.
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Andrew Sheldon www.sheldonthinks.com

Treading where others fear - risks with foreclosed property

This is my response to a forum post I found on foreclosed property. The argument is basically...if foreclosed property is so good, why isn't everyone doing it.

[QUOTE=Base]The keibaiyasan (foreclosure "helpers") charge high because auctioned places are full of properties with easements and other problems. You can get burned easily if you don't know what you're doing, which is why regular Japanese don't participate.[/QUOTE]

Problems, problems, problems. Risks are not avoided, they are managed. There is so much 'scary risk' priced into foreclosed property in Japan, only an absolute idiot would lose money. Now, when I think of risk management, I don't consider the Japanese to be among the most prudent in the world. Why? They are risk evaders rather than risk managers. Of course we can all huddle in our parents home until they die, or we can step out in the real world and build/buy our own home. Its hard to finance a property anywhere in the world. Japan offers the promise of buying a very cheap place for cash, and you can actually profit just on the purchase.

This guy talks about the risk of the property having easements. If you think about the actual risk involved, quantify/qualify it, it really is a small risk, and easily managed. For instance:
1. I would not expect new subdivisions to have land boundary problems because they are surveyed from fresh development title. Old farms in rural areas could have problems like these because they have multiple houses owned by family, then family members sell to strangers.
2. I would only expect easements to be a problem if you are building a new place. If you are happy with the existing home, again, so problem exists. If you intend to demolish and rebuild (which you shouldn't do), then you build within the context of the constraints.

You will come across farm houses which will have unlicensed buildings, underwater water storage banks, septic systems, etc. Do you need to fear? Japan has only been a highly organised society for the last 30 years. Before that it was the 'Wild West', people doing as they pleased. This is the culture in the rural areas. Now Japan has cities because its no longer an agrarian society. Do you think the local govt is going to come in and ask you to change something done 30 years ago. Particularly after the court documents (i.e. the govt) did not say it was there. The answer is no because there are many such instances of illegality in the old days.

Foreclosed properties are one of the best kept secrets in Japan, and thinking people are engaging in the market. Japan is full of 'safe' people, but given the number of people, the country still manages to pack a city office on bidding day. But it has many more foreclosed houses , so its quite an opportunity. You don't have to pay thousands for a broker to guide you through the process, you choose to. There is a book on this website for those who tread where others fear. Japan is not the only oppportunity, but its a hell of a nice place to live, and it is the cheapest. I couldn't find a cheaper place in the Philippines at the same standards of housing. And far better facilities.

PS: Risk is managed, not avoided. One persons perception of risk is another man's opportunity.
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Andrew Sheldon www.sheldonthinks.com