The taxation of foreign superannuation funds in New Zealand has been an area that has caused much difficulty for many foreign migrants and returning residents. The incorrect application of New Zealand’s tax laws, or general non compliance, was common. Under the new provisions (introduced to Parliament today) a streamlined system will apply to the withdrawal, by New Zealand tax residents, of lump sums from foreign superannuation funds (this includes lump sum transfers to other funds in New Zealand or overseas).

For everyone who has not paid the correct tax the government is offering a partial amnesty. This applies to lump sum withdrawals or transfers from foreign schemes from 1 January 2000 to 31 March 2014.  The amounts must be included in the 2013/14 or 2014/15 tax return.

There are some cases where applying the existing law may yield a better result, however, these people will be liable for penalties and interest from the date that they did not pay the tax due (as an example, this could be from the year 2000).

The key message for those many people who have failed to correctly declare and pay tax in New Zealand, on their overseas superannuation income, is that you should deal with this now. The limited amnesty will only be available for a short time. Bearing in mind that liabilities and interest usually cause tax debts to double after the first three years (and then it gets worse after that) dealing with this now is the only option. If you have a concern about affording payment to the IRD, the correct thing to do would be to declare and then to seek a repayment arrangement. Doing nothing is likely to catch up with people given the IRD’s focus on international tax disclosure and avoidance.

If you are in a situation where double tax may apply, or if you are affected by New Zealand’s transitional tax system, please note that different considerations may also apply.

Generally the FIF rules will no longer apply (although they may continue to do so in certain circumstances where they have been consistently applied in the past).

Please talk to us in confidence if you have any questions.

How is your imputation credit account? With limited exceptions all New Zealand resident companies must have an ICA account. Imputation credits have value as they can be passed through to shareholders and used to reduce the tax that shareholders might otherwise be liable for on company dividends.

A key point is that in order to carry forward imputation credits, 66% shareholder continuity must be maintained for the period from the time the imputation credit arises until it is used. The time to consider the impact of shareholding changes is before it occurs.

Imputation credits don’t have the same value to all shareholders. They may, for example, not have value for charities or overseas shareholders. Who your shareholders are is an important factor in considering your company or group structure.

Imputation credits are recorded in a memorandum account. There is no limit on how far back the IRD can go when looking at memorandum accounts. Imputation credits need to be carefully managed so that the company does not try to pass them on to shareholders when they no longer exist (for example, because the shareholder continuity requirement was breached), or because an error in the account many years prior has led to a debit in the account. Imputation credit accounts are an area that the IRD is focusing on. It is essential to get it right in order to avoid the loss of valuable credits or the imposition of tax penalties. 

Many people have been sold on the benefits of a look through company (LTC), however, there are significant disadvantages. The disadvantages include:

• An LTC is usually the wrong structure if you are making profits.
  
• Changing from an LTC can be costly and it can generate large taxable profits for which the shareholder are personally liable.
  
• Shareholders may need to personally fund their share of the tax due on the company’s profits.
  
• A company can lose its LTC status without the owners being aware that this has happened. Tax consequences will result.
  
• An unhappy ex spouse or ex business partner can easily and legally sabotage the LTC, causing the other shareholders to have huge tax complications.

For further details please read our in depth article.

Some liken taxation to theft. For these people trying their utmost to remove earnings and assets from the tax net is a no brainer. People with this view point can justify their actions as they believe they are keeping what is theirs and to which the state has no right.

Most people accept the need to pay some tax in exchange for the general benefits they receive personally, and as a society. However, those people may harbour strong disagreements in regard to the use that the state puts some of their taxes to. For example, a Catholic taxpayer may strongly object to paying tax to the state if the state allows abortion on demand. A member of the 99% Occupy movement may strongly object to paying tax if some of that tax money is used to bail out wealthy bankers. A business owner may object to his or her taxes being used to subsidise people who don’t want to work or who are otherwise economically unproductive.

One solution to this ethical dilemma is tax and asset planning that enables the taxpayer to minimise the tax they pay to the state. Any tax saving could be donated to a charity in line with the taxpayer’s ethical beliefs. As long as the taxpayer acts carefully, such a solution provides a means for the taxpayer to do what is right while not placing themselves legally in harms way.

The country you are a tax resident of normally has the right to tax your worldwide income. Becoming a tax resident of New Zealand usually requires that you are in the country for more than 183 days in a 12 month period, or that you have an enduring relationship with the country (even if you are in the country for less than 183 days).

It is harder to lose your tax residency status. If you are away from New Zealand for more than 325 days in a 12 month period you may lose your tax residency – unless you have retained enduring ties with New Zealand. If you have enduring ties in New Zealand you may remain a tax resident indefinitely, no matter how long you are out of the country.

Many people face issues with being deemed as tax residents of more than one country or they have uncertainty over which country they are a tax resident in. Double tax treaties provide a way to resolve these issues.

In other cases, tax residency is an important tax planning issue. As a migrant, high net worth investor, or an employee of a multi national company, you may have income of a particular type, or for a particular time period, that you either do or do not want to have taxed under New Zealand law. It is important to examine the implications for you before you take steps to relocate to or from New Zealand to ensure that valuable tax benefits aren’t lost.

What’s the difference between:

Tax fraud;

Tax evasion;

Tax avoidance; and

Tax  mitigation?

Why does it matter?

An example of tax fraud could include charging GST on sales when you have no intention of paying that GST to the IRD. Examples of tax evasion could include consistently selling goods on Trade Me and not declaring the income, or the failure to declare interest earned on overseas bank deposits.  Tax evasion and tax fraud can lead to jail time, as well as high penalties. Tax fraud and tax evasion involve illegality.

What about tax avoidance? Defining what is tax avoidance can be difficult but generally it does not involve illegality. Many people who have found themselves in this category probably believed that they were acting legitimately in structuring their tax affairs. In determining whether an arrangement constitutes tax avoidance the IRD will look at a  number of factors, including: whether tax minimisation is the dominant reason for the arrangement, the economic reality and economic effects of the arrangement, and whether the tax outcome is different from Parliament’s intention.

Some examples of unacceptable tax avoidance include:

Professionals diverting income from their personal work through trusts and companies in order to pay less tax.

Selling your family home to a company and then renting it back. The company deducts interest, rates and other expenses in its tax returns.

Using loans from a trust to fund your living costs, where the economic reality is that the loans are in the nature of income but no tax is being deducted from payments made.

If the IRD (or Court) deems that your arrangement constitutes tax avoidance, penalties, interest and tax will be payable. The amount due can easily become very large, especially if more than once tax year is involved or if the arrangement is an older one (so that penalties and interest have had longer to accumulate).  In one case, an employee of a multi national was unaware that he had become a New Zealand tax resident. The IRD determined that he owed $350,000 in back taxes, penalties and interest. In another case the total payable amounted to $2.3 million.

What about tax mitigation? Tax mitigation involves acceptable tax planning. It has been called “sleep at night” tax planning. Tax mitigation involves finding tax efficient ways to structure business transactions. The tax effects remain within the letter and the intent of the law. Taxpayers are entitled to take account of potential tax savings when making business decisions but this should not be the dominant purpose, nor should artificial structures be put in place.

There are many grey areas and careful advice is needed to ensure that the correct business and tax decisions are made and so that you know where you stand. Please ask if anything is unclear.

The OECD recently released a report entitled, “Addressing Base Erosion and Profit Shifting (BEPS)”. Most of you have probably switched off by now, but the fact is that the OECD’s work impacts on everyone.

Why? Because the issue of multinationals being able to shift profits from countries like New Zealand to low tax countries like Bermuda means that they pay less tax in New Zealand than many small companies. For example, Google New Zealand paid tax of $109,038 on New Zealand income of $4.5 million. Google is able to do this by taking advantage of international laws. So for example, money paid by New Zealand advertisers for Google ads is deemed earned by Google Ireland. In 2011 Google Ireland had gross profits of €9 billion. You’re probably thinking that Google paid a large amount of tax in Ireland but you’re wrong. That huge income was offset by “administrative expenses” and the profits were routed to a tax haven. Google is acting in a rational and legal manner, maximising shareholder value and complying with the tools that it has been handed by tax laws that have failed to keep up to date with changes in international practices. Because of these types of business practices it is estimated that New Zealand missed out on $1.5 billion of taxes last year. Not only does this mean less money available to the government to pay for the things the country needs, it is unfair to other businesses, and individuals, who have to pay their taxes in full because they don’t have access to sophisticated tax planning schemes.

Dealing with these issues will require greater legislative cooperation between countries. The OECD report is a step in that direction. It recognises that tax shifting is a problem for many Western countries and that they need to work together to develop a plan to make the tax system fairer to everyone.