Overseas Case Studies and Examples
21 July 2017
OVERSEAS CASE STUDIES AND EXAMPLES
Joe is from the UK and has moved to New Zealand in April 2012.
CASE STUDY ONE:
Joe has a rental in the UK. Does he need to return the income in New Zealand?
The general answer is yes. Once Joe becomes a tax resident in NZ, then he needs to return his world wide income in NZ, and pay tax on this in NZ. If Joe is paying tax in UK on the rental profit, he will get a credit for this in his NZ tax return. But if Joe is paying a higher tax rate in UK, then he will still only get a credit for the NZ tax due, i.e. if paying 40% tax in UK, but only 33% in NZ, then will only get a credit for 33% in NZ.
4 year exemption - There are some restrictions such as no Working for Families, but in general, if you have just moved to NZ for the first time, then there is a 4 year exemption on foreign income:
- so for the first 4 years, Joe doesn't have to return the UK rental income in NZ.
- After the 4 years, Joe will have to return the UK rental income in NZ.
CASE STUDY TWO:
Joe contracts back to his old employer in the UK. They pay him his normal salary, to his UK bank account with UK withholding tax deducted.
It is 2013, so still within the 4 year exemption. Does Joe need to return this income in NZ?
Yes, this is still taxable in NZ. The 4 year exemption does not cover income earned for personal services.
Most likely in this case, there should be no tax deducted in UK, and NZ would have the sole taxing rights. So if you have a situation like this, it is important to get the tax right at the start, otherwise you could be double taxed!
CASE STUDY THREE:
If you are currently receiving a monthly pension from overseas, the pension is fully taxable in NZ (Presuming you are a NZ tax resident).
Say it is $10,000 that you receive each month.
Some tax payers have changed their monthly payments to an annual payment. So following the example above, that would give an annual payment of $120,000 for the year. Then the tax payers are trying to say, its a lump sum and then taxable under the schedule/ formula method, which results in less tax being payable.
Unfortunately, NO. This is still a pension and not a lump sum. So is fully taxable!
CASE STUDY FOUR:
Joe has 200,000 pounds in an offshore bank account. There is no way NZ IRD will find out about that. Right?
With relatively new information sharing between countries, it is likely that IRD will find out! It is likely that the overseas bank will ask for a Taxpayer Identification Number (TIN), and therefore the information will be passed onto NZ IRD.
NZ IRD will look for:
- Should the initial capital have been taxed? For example, could be taxable distribution from a Non Complying Trust.
- Should there be ongoing income that should be taxed in NZ?
CASE STUDY FIVE:
Joe has a Trust that he established in the UK while he lived there. Is there anything that needs to be urgently done?
Yes - Joe has 12 months to elect for this Trust to become a complying Trust. Otherwise it becomes a Non Complying Trust, which has a 45% tax rate on capital gains and past year income!
NZ has a settlor based tax regime, so the Tax is generally based on where the Settlor is.
CASE STUDY SIX:
Joe has lived in NZ for 10 years, and it is now 2022.
His parents still live in the UK, and they both passed away. Surely the overseas inheritance is tax free?
There are tax implications to consider:
- Joe’s parents' Estate will be considered and taxed as a Trust in NZ. So need to consider tax obligations of Trust in NZ. For example, has Joe become a settlor of this Trust, and therefore Case Study 5 applies?
- In some countries, there is no Probate and Joe would receive the assets, and therefore the income, straight away upon the death of his parents.
CASE STUDY SEVEN:
Joe has an Australian rental property. In the 2014 year, it makes a loss of $12,000. What could Joe do?
- Could opt out of 4 year transitional period, so that the loss could be included in NZ tax return. Obviously would have to carefully consider other overseas income and assets.
- Be careful who the money is loaned from, as may have to deduct Non Resident Withholding Tax (NRWT). Or it could be worth applying to pay Approved Issuer Levy (AIL) instead.
- As there is capital gains tax in Australia, it is worthwhile (and a requirement) filing annual tax returns in Australia, so that the losses carry forward. This could offset some of the capital gain when the rental is eventually sold.
- The $12,000 loss would need to be converted to NZ dollars. Also, some of the expenses claimed in Australia might not be deductible in New Zealand, and commonly the depreciation needs to be reviewed and updated for NZ tax laws.
- There could be an exchange gain or loss that is taxable! See my previous blog.
Overall I hope this blog highlights that there are a lot of tax implications related to having assets overseas, and people who move to New Zealand need to carefully consider all of these implications!
Kind regards
Ross Barnett
