The Great Unexpected: tax issues facing those with foreign assets and liabilities (Part 2)

Common issues for those holding foreign assets and liabilities continued…

Shares held in foreign companies

Shareholdings in foreign companies by New Zealand tax residents are generally defined as Controlled Foreign Companies (CFC) or Foreign Investment Funds (FIF). In some situations, a foreign company can even be deemed a New Zealand company.

Understanding which type of foreign investment you have can be difficult and needs to be analyzed by a tax professional. To avoid too much complexity, we will focus on the most common type, the FIF.

The term FIF is commonly seen in investment portfolios, both small and large. It encompasses almost all foreign shareholdings where the shareholder is investing in foreign listed companies.

FIF rules override and disregard the common New Zealand expectation that the only thing taxable on shares is dividend income.

There are numerous ways income on FIFs is calculated, however the below simplified example focuses on the two most common. The Fair Dividend Rate (FDR) and the Comparative Value (CV) methods.

	(NZ$)
Tax Year Opening Market Value of FIF (100 Shares)	100,000
Cost of FIF Purchases this tax year (50 Shares)	40,000
Dividends this tax year	2,000
Sales of FIF this tax year (50 Shares)	55,000
Tax Year Closing Market Value of FIF (100 Shares)	120,000
FDR Income is 5% of Opening Value	5,000
CV Income is overall gain (realized and unrealised)	37,000

As per the extremely simplified example above, FDR income is calculated based on 5% of the opening market value of an FIF for that specific tax year. CV is calculated based on both the realized and unrealized gains of the FIF during the tax year. Many investors can choose the lower of these two methods, however the method used must be consistent across FIF investments. Unfortunately there are some entities and investments which must use a specific method.

Don’t start to panic yet! There are exemptions to the FIF rules. If the total cost of FIF investments is less than $50,000 or the foreign investments meet the Australian listed share exemption, then investors can happily go back to recording only dividends in tax returns. If, however these exemptions do not apply then dividend income will become mostly irrelevant and these quasi capital gains or notional non-sensical income will potential inflate many investors tax returns.

Foreign pensions and superannuation schemes

The tax rules regarding foreign pensions and superannuation schemes caused quite the stir during 2013 to 2015. Due to very poor compliance the IRD issued letters to those that had transferred or received payment for their foreign superannuation schemes prior to 2014. These letters resulted in significant lobbying and pressure to simplify the historical complex rules.

The result was a positive change, but still not simple.

Firstly, it is important to recognize there is a difference between a “state” pension i.e. a government paid pension and a private or mandatory superannuation fund. In many circumstances New Zealand has Tax Treaties with foreign countries that give New Zealand that right to tax foreign pensions on its New Zealand tax residents, however there are exceptions.

Aside from the various tax rules, New Zealand’s own state pension (NZ Super) can be impacted by the right to receive state pensions from foreign governments. NZ Super also provide a system that can minimize the tax compliance for those that receive foreign State pensions and NZ Super.

Secondly, how often the pension or superannuation is paid makes a significant difference to what rules might apply. A regular and continuous payment is often deemed to be an annuity, whilst a one off withdrawal of a superannuation is deemed to be a lump sum payment.

Unless one of the few exemptions apply, a pension or superannuation that is paid like an annuity is 100% taxable, whereby all payments received, whether into a New Zealand bank account or foreign bank account will need to be included in the New Zealand tax return.

If the foreign pension or superannuation payment is in the form of a lump sum or transfer from a foreign superannuation fund into a New Zealand superannuation fund then the rules become more complex. There are two methods available to calculate the amount of income that must be reported in the New Zealand tax return. The most common of the two is the scheduler method, whereby the amount of income to declare increases based on how many years you have been a New Zealand tax resident at the time of payment or transfer.

Year	Percentage %	Year	Percentage %
1	4.76	14	60.27
2	9.45	15	64.08
3	14.06	16	67.84
4	18.60	17	71.53
5	23.07	18	75.17
6	27.47	19	78.75
7	31.80	20	82.28
8	36.06	21	85.74
9	40.26	22	89.16
10	44.39	23	92.58
11	48.45	24	95.83
12	52.45	25	99.08
13	56.39	26+	100.00

Do you need to panic now?

If you have recently become a New Zealand tax resident, then start planning rather than panicking. Individuals that have become a tax resident for the first time, or haven’t been a tax resident for the past 10 years are exempt from almost all of the above tax issues for 4 years from the date of becoming a tax resident. This exemption is called transitional tax residency, however it can only be used once.

If you have been a New Zealand tax resident for more than 4 years then get your head out of the sand. Should IRD come knocking then ignorance is definitely not bliss.

Due to its complexity, this content is general in nature and should not be taken as specific advice. It is extremely important to discuss any foreign holdings you have with a tax professional to assess potential tax issues.

Call Withers Tsang on 09 376 8860 to understand your tax obligations, plan your cashflow and get great property, business and tax advice.