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Following the recent disclosure requirements in terms of Automatic Exchange of Information Agreement, we are now seeing the next wave of enforcement from Inland Revenue.
As a result of these protocols giving rise to more formal automatic exchanges of information between government entities, the Inland Revenue has started issuing letters to taxpayers regarding foreign income and tax residence status. We have received many on behalf of our clients.
The letters generally start with the observation that Inland Revenue began the automatic exchange of information in September 2018 and has received financial account information on New Zealand tax residents from 66 jurisdictions (soon to be 100).
The letters then have a section headed "Your action required". This portion of the letter varies from taxpayer to taxpayer. Our observation is that there are three main variants.
One version requires the recipient to complete a confirmation form that they have returned all foreign-sourced income and invites disclosure if they have not.
Another version requires details of when the person was tax resident in New Zealand and/or elsewhere.
Yet another version requests details of foreign income to be disclosed in New Zealand, and suggests disclosure occurs.
It must be assumed, in each case, that the exchange of information has resulted in the Inland Revenue having collected information about each taxpayer, in terms of residence and/or foreign income sources.
It must also be assumed that there is at least some view by Inland Revenue that income has not been declared in New Zealand when potentially it should have been.
In plain language, the letters we have seen could be summarised as:
- "You have disclosed some foreign income but there's a good chance you may not have disclosed it all, so we are asking the question ... "
- "You have been tax resident somewhere else so let's make sure all the data lines up with what you have previously told us."
- "We have received some information that possibly doesn't align with what you have previously told us, so we'll give you the chance to come clean before we act."
Based on the letters we have seen, the targeting is not random. The net has not been cast widely. In each case, there has been sources of overseas income earned, or overseas investments that may not have been returned.
This could be foreign shares, foreign bank accounts, foreign property, or other types of foreign-based investments/assets.
Let's be clear, there could be valid reasons for not returning this foreign-sourced income in New Zealand, as there are many situations where the income may not be subject to tax in New Zealand. Of course, Inland Revenue is interested in situations where income should have been returned in New Zealand, and it has not been.
However, we see the opportunity for taxpayers to actively manage disclosure (rather than audit being the first option by Inland Revenue) as a positive approach, given the new, much smaller world we now live in.
Before responding to Inland Revenue, we strongly urge anyone receiving such a letter to talk through with their tax adviser any possible overseas income sources, and whether there is a taxation obligation in New Zealand that has been overlooked or even miscalculated.
But do not ignore it. Managing how you respond to Inland Revenue will be critical in terms of the outcomes for each person.
- Scott Mason is a managing partner and tax specialist at Findex in Dunedin.