Overseas Income Causing Tax Headaches by Jancy Stott
15 Jul 2016
International tax laws are complex and the way they're applied can depend on taxpayers' specific circumstances and the different jurisdictions involved.
FACT: Migrant and returning New Zealanders may qualify for a four-year period of transitional tax residency, giving them a tax exemption on some of their foreign income.
Of course certain conditions must be met. You must not have been a resident (for tax purposes) in New Zealand for the last 10 years, AND you qualified as a New Zealand tax resident on or after 1 April 2006, AND you haven't received the exemption before. That's right – you can only get the exemption once.
You become a NZ tax resident when you've been in NZ for more than a total of 183 days in any 12 month period or you have a 'permanent place of abode' in NZ. The temporary tax exemption for foreign income begins on the first day of NZ tax residency. It ends 48 months after the month of qualifying as a tax resident. Beware the 183 day test. As soon as you exceed this time frame, you become a NZ tax resident and the clock starts ticking. Determining a migrant or returning New Zealanders tax residency is critical.
Transitional residents who are entitled to the exemption can't claim expenses on exempt income, including foreign losses (for example your house in the UK that you're renting out for a loss). Once you return income that would otherwise be exempt, you opt out. This is irrevocable. Opting out also includes if you or your partner apply for Working for Families Tax Credits as these are not available for transitional residents.
FACT: Foreign income doesn't need to be brought into New Zealand to be taxed here. Income that's had withholding tax deducted, been deposited in offshore accounts, or left on a foreign credit card could still be taxable.
The IRD are actively informing taxpayers and conducting audits on the lack of disclosure surrounding overseas income. What they're realising is that information is being omitted from tax returns due to lack of awareness of what actually needs to be in there.
Foreign income that's paid into an offshore bank account or funds an offshore credit card, even if it's had foreign withholding tax deducted, will be still be taxed in NZ. Most overseas pension payments are fully taxable in NZ and can include both lump sum payments as well as a regular pension payments – even if the interest was acquired before the holder became a NZ tax resident. Distributions from foreign trusts to a NZ resident beneficiary will generally be taxable (including inheritances from deceased estates), unless they represent realised capital gains or the corpus of the trust. A foreign life insurance policy is an interest in a foreign investment fund (FIF) and the income needs to be accounted for annually. In many of these circumstances exceptions exist but this illustrates how complicated these issues are.
Now, I can read your mind. What IRD doesn't know won't hurt them, right? I just simply won't tell them about my overseas income. Wrong, my friend. New Zealand has joined a global automatic exchange of information and more than 100 countries have followed suit. This will allow IRD to exchange data with other jurisdictions worldwide. They intend to include all investment income (including disposals), account balances, tax identification numbers (IRD numbers) and "controlling persons" for passive entities. The first reports are due from NZ financial institutions in mid-2018. So the clock is well and truly ticking on disclosing your foreign interests. If you would like to talk to someone about transitional tax residency or your other tax obligations and responsibilities in New Zealand, please make an appointment with our specialist advisors today.
PKF Poutsma Lemon Limited (Kerikeri Office)