The perils of foreign exposure
In our last article (available on 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 lent or borrowed funds to or from an overseas person or entity, you need to notify your tax adviser.
NZ taxpayers can no longer think that what the IRD doesn’t know they won’t find out about. NZ is one of more than 100 countries that are party to the Global Automatic Exchange of Information (AEOI).
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 foreign investment fund rules.
The majority of Australian-listed shares are exempt from FIF rules. There is also an exemption for individuals whose total cost of investments in FIFs did not exceed $50,000.
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 April 1, 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An amnesty was offered for those who had withdrawn or transferred funds between January 1, 2000 and March 31, 2014, to return 15 per cent of total transferred or withdrawn in either their 2014 or 2015 tax returns. It is not too late to make a voluntary disclosure and have your 2015 return reassessed. Penalties and interest will apply, but it may be preferable to how the IRD would treat the income now.
Lump sum superannuation withdrawals or transfers after April 1, 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 extent 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 per cent in Year 1 to 100 per cent after 26 years.
Transfers from an Australian scheme to a NZ scheme may not be 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 rules and exchange fluctuations.
Be open with your accountant about your worldwide financial affairs and avoid nasty surprises from the IRD.