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18 Aug 2016
In our last article (available on our website www.pkffa.co.nz) I discussed tax residency. However, it is not just new tax residents who need to be aware of the complex international tax laws. All NZ tax residents (who are not otherwise exempted) are subject to tax on their worldwide income.
If you have any overseas investments (shares, bank accounts etc), overseas pension or superannuation scheme, are a beneficiary of an overseas trust or estate, own an overseas property or have loaned any funds to or from an overseas person or entity, you need to notify your tax adviser.
NZ taxpayers can no longer bury their heads in the sand, thinking that “what the IRD doesn’t know they won’t find out about.” The international financial arena is changing. IRD has already received information from the USA under their Foreign Account Tax Compliance Act (FATCA). NZ, along with over 100 other countries, has also become a party to the Global Automatic Exchange of Information (AEOI), with the first 54 countries exchanging information in the 2017 year, and the balance following the year later.
NZ Taxation of overseas interests is complex and covered by multiple rules:
Shares in foreign companies, investments in a foreign unit trust and some foreign life insurance policies may be subject to the FIF (foreign investment fund) rules, which came into effect 1 April 2007. Prior to this a taxpayer was only subject to tax on the dividends received. Under the FIF rules, there may be taxable income, even though no dividends have been received. The majority of Australian listed shares are exempt from the FIF rules. There is also an exemption for individuals (not trusts or companies), whose total cost of investments in FIFs did not exceed $50,000 at any time during the year. There are various ways of calculating the FIF income and your tax agent will select the method to provide maximum tax advantage. Be aware that even though you invest through an investment portfolio such as Craigs, JB Were, Gareth Morgan, a bank portfolio etc, the portfolio may include FIFs.
Prior to 1 April 2014, investments in foreign superannuation funds were subject to the FIF rules. If a taxpayer had been correctly returning their income under the FIF rules prior to this date they can continue to do so. For the majority who weren’t, the rules now make proceeds taxable on receipt or transfer. An amnesty was offered for those who had withdrawn or transferred funds between 1 January 2000 and 31 March 2014, to return 15% of total transferred or withdrawn in either their 2014 or 2015 tax returns. IRD are now actively chasing up those who did not take advantage of the amnesty. It is not too late to make a voluntary disclosure and have your 2015 return reassessed to include the income. Penalties and interest will apply, but it may be preferable to how the IRD would treat the income now. Contact your tax agent urgently. You may be able to use the transitional tax resident exemption (refer our last article) to avoid taxation totally.
Lump sum superannuation withdrawals or transfers after 1 April 2014 are subject to the new rules. These apply even if the funds are banked into a foreign bank account or investment, transferred to an Australian or NZ super scheme, or banked to a NZ bank account. The extend to which the funds are taxable depends on the number of years you have been an NZ tax resident. Transfers in the first four years may be exempt. After that period there is a sliding scale as to what percentage of the amount is taxable. It varies from 4.76% in year 1 to 100% after 26 years. Transfers from an Australian scheme to a NZ scheme are also not liable for tax. Other foreign fund to foreign fund transfers are not taxable until final drawdown.
Investments in overseas bank accounts and property can also be problematic due to the operation of the financial arrangement (FA) rules and exchange fluctuations . As these are another complex area they warrant a separate article.
In summary, be open with your accountant about your financial affairs and avoid nasty surprises from the IRD.
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