Skip to main content

Overseas Investments - Offshore is not off-limits

Tax Alert - July 2022

You've probably heard the old investment saying, “don't put all of your eggs in one basket”. If you have, this may mean you have made some overseas investments but have you given thought to what this means when it comes to paying tax?

It goes without saying that managing your international tax obligations can be tricky. Our rules that tax foreign assets such as overseas bank accounts, shares, pension schemes, rental properties are a minefield of complex rules.

This makes it difficult for individuals to understand their tax obligations and often requires the assistance of a good accountant.

New Zealand tax residents are required to pay tax on their worldwide income, regardless of whether taxes are paid overseas and whether the income has been brought back to New Zealand. It does not matter that the income may be exempt in the overseas country and these are facts Inland Revenue have noted are commonly misunderstood, especially by those who are new to New Zealand.

The days of thinking Inland Revenue have bigger fish to fry are long gone and in June 2022, Inland Revenue released their offshore tax transparency package with a compliance focus targeted at reminding individual taxpayers of their tax obligations.

The offshore tax transparency publication highlights that over the years, there has been an increase in the sharing of taxpayer information between countries. This has provided Inland Revenue greater oversight of the offshore investments New Zealand tax residents hold in their portfolios.

Inland Revenue have emphasised that they now collect a wealth of information through their extensive exchange of information programmes that includes:

  • Exchanging information on request from treaty partners;
  • The annual exchange of land data with treaty partners;
  • Proactively sharing information that may be considered relevant to share with treaty partners;
  • Sharing information under the Foreign Account Tax Compliance Act (FATCA);
  • Sharing information with over 100 countries under the Common Reporting Standard (CRS); and
  • Sharing of information on New Zealand foreign trusts.

In the future, information sharing for cryptocurrency holdings is likely, with work being undertaken by the OECD to develop framework to share details of crypto transactions across jurisdictions.

Armed with the financial data received from information sharing (details on interest from bank accounts/deposits, credit card listings, dividends, pension payments as well as land sale data), Inland Revenue is ramping up its focus on international tax compliance for individuals to ensure that worldwide income is being declared.

Analytical tools have been developed by Inland Revenue to work through the volume of data received and match this with information reported in New Zealand income tax returns to check that income is being returned in New Zealand and where this is not the case, don’t be surprised if Inland Revenue l follow up with questions to taxpayers to clarify the reasons for any omissions.

As a result of recent campaigns targeting those considered to be highly mobile individuals or those with investments in low or no tax jurisdictions, Inland Revenue have seen a significant number of voluntary disclosures in relation to undisclosed income.

They continue to encourage taxpayers to come forward to try and front foot any omissions as part of their “Right from the Start” campaign and as part of this strategy have released a series of documents to remind and educate taxpayers on their obligations:

  • An updated Foreign Income Guide (replacing publication IR1069) that covers a range of topics relevant to those with foreign assets. This guide now includes worked examples of how the foreign investment fund and financial arrangement regime can apply to taxpayers;
  • Foreign Income Checklist (designed for tax agents to collect information from their clients in relation to overseas investments); and
  • The Transitional Residency Flowchart designed to help taxpayers determine if they are transitional residents and thereby providing taxpayers with temporary relief from New Zealand tax on overseas assets.

As part of the educating taxpayers, particularly those new to New Zealand, Inland Revenue have noted the following:

  1. Your tax residency status in New Zealand is different from your immigration status.
  2. In general, New Zealand tax residents pay income tax on their worldwide income while-non-residents pay on income from New Zealand.
  3. Your worldwide income can include foreign income even if you have not repatriated it to New Zealand or you have paid tax on it in the other country or the income is exempt in the other country.
  4. Some rules in New Zealand may tax capital gains and may do so even though the gain has not been realised. Examples include the foreign investment fund and financial arrangement rules.
  5. New tax residents and former tax residents returning after 10 years may qualify for a temporary tax exemption on most, but not all, forms of foreign income.
  6. New Zealand will usually give a credit for tax paid to another country, capped at the amount of tax payable here on the foreign income.
  7. [Inland Revenue] advise you to consult a tax agent knowledgeable in international tax if you’re not sure how the law applies to your situation as some of the rules can be complex.
  8. If New Zealand has a double tax agreement with another country, it may affect how your income is taxed.
  9. There are shortfall penalties for not declaring income but they can be reduced by up to 100% if you make a voluntary disclosure.
  10. Inland Revenue exchanges financial information about taxpayers annually with many other countries and matches it to tax returns.

A lot can go wrong when dealing with the taxes on overseas investments.

We recommend reading the foreign income guide if you have overseas investments, as it provides a good summary of the New Zealand rules.

If you have overseas income that may have not been included in your New Zealand returns, don’t wait, as it will only be a matter of time before Inland Revenue will come asking you questions.

If you find yourself in this situation, the best course of action is to calculate what is due, lodge a voluntary disclosure, pay the taxes (if any), and get your position right going forward. Take the advice of Inland Revenue and “consult a tax agent knowledgeable in international tax” as “some of the rules can be complex."

For more information on any of the topics above, please contact your usual Deloitte advisor.

July 2022 - Tax Alerts

Did you find this useful?

Thanks for your feedback

If you would like to help improve further, please complete a 3-minute survey