Tax Bites #9
About the Author:
MURRAY McCLENNAN
Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.
Foreign Tax Credits
Generally, income tax is imposed on the basis of tax residency or source. For example, a New Zealand tax resident is subject to New Zealand income tax on his or her worldwide income.
If that income includes Australian rental income, Australia taxes the income based on source. Australia has the first right to tax the income and foreign tax credits flow to be offset against New Zealand tax payable on the same income. There may still be some tax payable in New Zealand on such income. If the foreign tax credit is greater than the New Zealand tax payable on the foreign-sourced income, New Zealand will not refund the difference.
The average and not the marginal New Zealand tax rate is used to calculate the level of foreign tax credit that may be claimed.
It is important to ensure that the foreign jurisdiction has the right to tax the foreign-sourced income. If there is a Double Tax Agreement (DTA) between New Zealand and the foreign jurisdiction, it is possible that New Zealand will have the sole rights to tax the income. If this is the case and foreign tax is paid, there is no right to claim a foreign tax credit against the New Zealand tax payable. An example of this is that New Zealand has the sole right to tax UK pensions received by New Zealand tax residents. Tax was often deducted at source in the UK and claimed as a foreign tax credit. I know of several people who had to pay additional tax in New Zealand and claim refunds in the UK.
To the extent that a New Zealand company uses foreign tax credits against its New Zealand income tax liability, no New Zealand income tax is paid. This may seem self-evident, but it is important as there is no ensuing imputation credit. This may not be an issue if a company retains some of its profits. However, if a New Zealand company has significant foreign income that is subject to foreign tax, the effective tax rate on dividends paid to New Zealand shareholders will be higher than if there had been no foreign tax paid and no tax credit.
If a business activity will give rise to significant foreign tax credits the New Zealand principals may wish to utilise a transparent entity, such as a Look-through Company or a Limited Partnership. Alternatively, a trading trust or a general partnership could be used, as foreign credits would flow with the income directly to the taxpayer.
GST – EXPORTED SERVICES.
Three separate provisions need to be considered – sections 11A(1)(k), 11A(2) and 11A(3).
The service must be to a non-resident, who is outside of New Zealand at the time the services are enjoyed, which may be different from the time of supply.
Essentially there is a 4-step approach:
Note, if services are performed overseas, the local GST/VAT laws need to be considered. For example, a New Zealand project manager goes to Australia to oversee a large-scale project, a New Zealand entertainer has a series of gigs in Australia.
Director
Tax Central Ltd
027 244-5365
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