The reason the IRD contacted our client is because New Zealand is part of a global initiative called the Automatic Exchange of Information (AEOI). Led by the OECD, this initiative is designed to prevent tax evasion and ensure everyone pays the correct amount of tax in the various jurisdictions in which they are required to declare income (i.e. both in their country of residence and anywhere else they earn income).
How does the AEOI work?
Under the AEOI, all reporting financial institutions must identify and collect information on accounts held by foreign tax residents, and then report this to their respective tax authorities. This information is then shared with the tax authority in foreign resident’s country of residence (if that country is part of the AEOI).
So in the case of our client, the financial institution in the UK gave their financial information to Her Majesty’s Revenue and Customs, who then reported it to the IRD in New Zealand. Once the IRD received this information, they contacted our client to give them the opportunity to check their affairs to make sure they have returned the right amount of income. If income has been returned incorrectly (or not at all), taxpayers have the chance to fix this and suffer fewer penalties (or avoid them altogether) than if the IRD discover the errors themselves.
Cross border tax issues
This brings us to an important point if you earn income in multiple tax jurisdictions: you must consider cross border tax issues, which means you will need to file a tax return both in your country of residence and the other tax jurisdiction(s). In some cases, this means you could be taxed twice on the same income, unless New Zealand has a double tax agreement (DTA) with the other country. Currently New Zealand has DTAs with a number of countries, including Australia, the UK, Singapore and USA. You can find a full list here.Obviously not all countries have the same tax rules, and tax paid in one jurisdiction may be more or less than what is required to be paid on the same amount of income in the other country. If the countries involved have a DTA, tax paid in one country is offset against the tax obligations of the other country as a tax credit, and only the difference needs to be paid.
The AEOI makes it a lot harder for people to hide income, and we fully agree with this principle.
What does this mean for you? If you earn income in more than one tax jurisdiction, or earn income in one country but live in another, be sure to get advice from expert tax advisers in each country where you have financial accounts, so you fully understand your tax obligations, return the correct amount of income in each country, and thus avoid penalties.
If you need advice on your New Zealand tax obligations, please contact GRA on +64 9 522 7955, firstname.lastname@example.org or via our website.