Understanding your foreign exposure to tax

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.” Be aware that NZ is one of over 100 countries who are party to the Global Automatic Exchange of Information (AEOI), resulting in the information regarding investments and income being transferred between tax jurisdictions.

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 April 1, 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, NZ Funds, Fisher Funds, a bank portfolio etc, the portfolio may include FIFs.

Lump sum foreign 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 at all. 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 taxation of exchange fluctuations. Funds borrowed overseas can also have tax implications.

In summary, be open with your accountant about your worldwide financial affairs and avoid nasty surprises from the IRD.