Inland Revenue’s Top 10 misconceptions for individuals

8 April 2011

Andy Crossen, Associate, Tax for Grant Thornton New Zealand Ltd looks at Inland Revenue’s recently released a list of what they have described as the “top 10 misconceptions for individuals” with respect to international tax.

The list (reproduced below) is useful in that it highlights some general principles that impact on the way New Zealand tax law operates which are not necessarily intuitive. It reinforces the fact that many taxpayers have tax issues and obligations that may not seem obvious and for which advice should be sought. The following is the list as produced by the IRD:

•New Zealand residents are not just taxed on the income they earn in New Zealand. They are also taxed on their worldwide income.

•If a person leaves New Zealand but maintains a permanent place of abode in New Zealand, that person is still a New Zealand resident for tax purposes.

•Foreign income including investments (even if deposited in an offshore account or left on a foreign credit card) is taxable in New Zealand even if it's not repatriated to New Zealand.

•The fact that withholding tax may have been deducted on foreign income does not mean that this income is no longer taxable in New Zealand.

•A foreign tax credit may be available but only where the tax involved is not subsequently refunded (even in a later income year) it’s substantially similar to income tax, and less than or equal to the tax otherwise payable on the underlying income in New Zealand.

•Not all overseas pension payments are tax-free. Certain ones may be fully taxable in New Zealand.

•Special taxing regimes (controlled foreign company and foreign investment fund rules) apply to gains on certain foreign shareholdings, retirement schemes and life insurance investments.

•Additional disclosures may be required in respect of controlled foreign companies and foreign investment funds.

•Allowances that may be treated as tax-free in other countries (for example, living-away-from-home allowances) are generally fully taxable in New Zealand.

•The temporary tax exemption on foreign income for transitional residents expires after 48 months and there is no entitlement to Working for Families Tax Credits during the period of the exemption.

The first key principle to draw from the IRD’s list is that tax residents are taxed on their world wide income regardless of where it is earned and regardless of where it is received.

The second is that certain economic interests outside New Zealand can give rise to tax issues in New Zealand regardless of whether they are producing what most people would consider to be an income stream or not.

Thirdly, deductions are not available for the costs incurred by salary and wage earners against that income.

New Zealand applies its own law at all times and the tax treatment in a foreign country does not necessarily agree with that in New Zealand and certainly does not over ride that of New Zealand.

It should also be noted that outside of the actual tax obligation itself, the holding of certain interests can generate disclosure obligations to the IRD even though there is no tax payable. Certain tax concessions can have wider implications (outside of tax) and care should be taken when accessing Working For Family Tax Credits if the tax payer is enjoying the benefits of New Zealand’s transitional residents exemption.

In summary, the release of the IRD list is timely and all taxpayers who think that they may not have been fully complying with their New Zealand obligations should consider seeking professional advice.

ENDS

© Scoop Media