By Shelley-ann Brinkley – 24 November 2011

The Inland Revenue is actively pursuing New Zealand tax residents who have undeclared foreign sourced income. What are your tax obligations? What are the consequences if you don’t comply? What should you do?

The Inland Revenue’s concerns

In a recently issued Revenue Alert, Inland Revenue outlined its concerns about New Zealand tax residents with taxable foreign sourced income held in offshore bank accounts that have not been declared in New Zealand for income tax purposes.

The foreign sourced income deposited into these offshore accounts could include income sourced from a non-resident employer, foreign life insurance policies, superannuation schemes or from certain equity investments.

Your tax obligations

A New Zealand tax resident must return and pay tax on all their income, including foreign sourced income received into an offshore bank account, if the person is a New Zealand tax resident at the time the income is derived. Whether the foreign sourced income is ever repatriated to New Zealand is irrelevant.

An individual is likely to be a New Zealand tax resident if they:

  • are present in New Zealand for more than 183 days in total in a 12-month period; or
  • have a permanent place of abode in New Zealand.

Accordingly, despite being absent from New Zealand, a person could still be a New Zealand tax resident if they maintain a permanent place of abode in New Zealand.

Inland Revenue has signed Tax Information Exchange Agreements with a number of countries, including well-known tax havens. These Agreements enable Inland Revenue to identify a person’s offshore bank accounts and obtain information about their international transactions.

The consequences of non-compliance

A New Zealand tax resident who has failed to return their offshore income is likely to incur shortfall penalties. These shortfall penalties may be reduced if the person makes a voluntary disclosure to Inland Revenue. However, if a person has deliberately avoided or evaded paying tax on their offshore income, criminal penalties may apply. 

What should you do?

If you have an offshore bank account, a foreign credit card or have foreign sourced income and are uncertain whether you have satisfied your New Zealand income tax obligations, we recommend that you contact your Hayes Knight adviser.