New Zealand (NZ) has had an automatic exchange of information (AEOI) agreement with several countries for many years. In the past, they have usually been an under-used tool for identifying tax evasion and the under-declaration of income.
Following the introduction of the Common Reporting Standard (CRS) effective from 1 July 2017, more information is being automatically shared across borders by various tax authorities worldwide. This means overseas assets and financial information are more transparent to the NZ Inland Revenue (IRD).
AEOI and CRS give IRD a simple way to know whether NZ tax residents have complied with the NZ tax law. This ensures NZ taxpayers pay the right amount of NZ tax on overseas income & minimise risks of tax avoidance or evasion.
Since early 2019, IRD started knocking on taxpayers’ doors where they have detected under-declared (whether deliberate or accidental) overseas income or investments.
It is often wrongly assumed that income arising in another country has no bearing on an individual’s tax position in NZ. This misplaced belief is particularly compounded when tax is paid, and a tax return is filed in the other jurisdiction.
As a general rule, NZ tax residents are required to return NZ sourced and foreign-sourced income. Income is categorised based on the type and “source” (i.e. the country it is derived from). Where income is foreign-sourced, NZ will still tax it but will allow foreign tax credits for tax “correctly” paid in the other jurisdiction.
Note the phrase “correctly taxed” here. If the taxpayer incorrectly paid tax in the other jurisdiction, foreign tax credits cannot be claimed to offset NZ income tax liability. The taxpayer will still need to pay NZ tax and will be expected to reclaim the tax incorrectly paid from the other jurisdiction.
Certain income may be exempt from NZ tax by reference to the specific article in the Double Tax Agreement (DTA) (read more about DTA here). Here is some foreign-sourced income that is most commonly overlooked:
- Bank interest on a foreign bank account
- Dividends from foreign shares
- Foreign rental income
- Foreign pension
- Foreign currency gains/loss
Generally, IRD is understanding of unintentional errors, and these can usually be rectified by voluntary disclosure to correct the mistake and settle the tax. However, this may expose the taxpayer to potential penalties and the use of money interest. In most cases prior to an audit notification, IRD may remit the penalties, but the use of money interest is likely to be imposed. For this reason, it’s always better to be on the front foot with any disclosure rather than having to play catch up in response to IRD’s action.
For those taxpayers who have recently received a letter from IRD, think carefully about whether you have missed anything. For those who haven’t yet received a letter, now is a good time to ensure everything is in order, and our experienced team can help you with that. Read more about our experience dealing with IRD here.
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