Skip to content

Taxing offshore income: IRD foreign tax obligations

It’s not uncommon for New Zealanders to have a foreign bank account or pension, a property, some shares or other investments held offshore. Mostly these are openly-held assets, accumulated as the result of living overseas or doing business in offshore jurisdictions.

Until recently, reporting the income to the New Zealand authorities has been a matter of volunteering the information in your tax return. Not anymore.

The same process of globalisation that has made it easier to travel and do business overseas has provided lucrative opportunities for offshore tax evasion. To close off the loopholes, governments have started to cooperate more closely.

The result has the dry name of the Common Reporting Standards (CRS). But what it really means is that governments are now sharing information.

That US bank account, Australian share portfolio, British pension or rental property in Spain. If you earned income from it, the New Zealand Inland Revenue Department will find out about it. And it will want its cut.

What you need to know about the CRS.

The CRS were developed by the Organisation for Economic Co-operation and Development (OECD)to provide a global framework for the collection, reporting, and exchange of financial account information about persons who invest outside of their countries of tax residence.

Over 100 countries have committed to exchanging information with each other under the CRS. The New Zealand Government implemented the CRS on 1 July 2017. The information received from other countries is used by Inland Revenue to detect and deter offshore tax evasion by verifying that these people have paid the correct tax on these offshore investments.

Cross-border information sharing now happens automatically.

According to the CRS, each country will annually automatically exchange with the other country the following information:

  1. Name, address, taxpayer identification number (TIN) and date and place of birth of each Reportable Person.
  2. Account number.
  3. Name and identifying number of the reporting financial institution.
  4. Account balance or value as of the end of the relevant calendar year (or other appropriate reporting period) or at its closure if the account was closed.
  5. Capital gains, depending on the type of the account (dividends, interest, gross proceeds/redemptions, other).

As of December 2020, there were over 4,400 bilateral exchange relationships activated with respect to more than 100 countries committed to the CRS.

What does this mean for those with foreign income?

The process is quite straightforward. Inland Revenue will compare the information it receives about your foreign income, look at your old tax returns, and then send you a letter enquiring politely if there’s something you haven’t told them.

Here’s the process in more detail.

If you are a New Zealand tax resident:

If you have financial accounts in any of the participating countries, this information may be shared with Inland Revenue. Inland Revenue will notify you they have received information from one or more jurisdictions concerning foreign accounts in your name.

Enclosed with the letter will be:

  1. A list of information Inland Revenue ask you to provide to understand the nature and tax treatment of your overseas income and assets; and,
  2. Information on the IRD voluntary disclosure process.

Those who aren’t New Zealand tax residents don’t escape scrutiny. Inland Revenue has the power to share your local financial information with the authorities in your tax-resident country, who will follow a similar process, as follows.

If you identify as being a foreign tax resident:

If you currently hold (and, in certain circumstances, control) an account with a New Zealand financial institution, your financial account information may be reported to Inland Revenue. Inland Revenue may share this information with your home country or jurisdiction if New Zealand has an information exchange relationship with them. This applies whether you are currently living in or outside of New Zealand.

What should you do if you haven’t paid the correct tax on offshore income?

First of all – don’t panic. Contact us, and we will discuss your options, which may include making a Voluntary Disclosure. This is when Crawford Nelson, on your behalf, formally notifies Inland Revenue of undeclared income, along with any explanations you might have for how this situation arose.

The good news is that this often leads to a less scary outcome.

We find the Voluntary Disclosures made on behalf of our clients often lead to Inland Revenue reducing assessments and waiving penalties. Every case is different, but by front-footing the tax discussion, you may find that the result is less unpleasant than you imagined.

At Crawford Nelson, we often find ourselves representing taxpayers who have accumulated years – or even decades – of offshore revenue they never paid tax on.

If that sounds like you, your first step should be to contact us.