IRD eyes offshore accounts
Richard Ashby
Offshore bank accounts are coming under increasing scrutiny by the Inland Revenue Department, writes RICHARD ASHBY
The Commissioner of Inland Revenue issued Revenue Alert RA 11/03 on 10th October 2011. An Alert provides information about a significant and/or emerging issue of concern to the Inland Revenue Department (IRD).
The concern raised is with respect to offshore bank accounts, which may be being used to shelter from NZ income tax, income that has been derived by a NZ resident taxpayer from offshore sources. For example, a NZ resident has a Hong Kong employer who deposits the employment earnings into a Hong Kong bank account. For one reason or another, the Hong Kong income is not reported by the NZ resident in their NZ income tax return. Consequently it’s not subject to the imposition of NZ income taxes.
The reason why the income has not been reported in the NZ income tax return could, amongst other things, be due to the taxpayer not being fully aware of their NZ reporting requirements for income tax purposes. Under NZ’s domestic income tax laws, a person or other entity considered to be a NZ tax resident must file a NZ income tax return that includes their worldwide income.
If you are unsure as to whether or not you are a NZ tax resident, you should either seek the advice of a professional adviser or alternatively, some information can be obtained from the IRD’s website, www.ird.govt.nz.
As a general guideline, however, if you have a permanent place of abode available to you in NZ (which is a wider definition than just having a home available to you), or you spend more than 183 days in NZ in any continuous 12-month period, you are likely to be a NZ resident for income tax purposes. Note that tax residency and residency for immigration purposes are entirely different concepts. You may have only recently arrived in NZ and have not yet obtained your permanent residency through NZ Immigration, but it does not mean you are not a NZ tax resident.
Failing to report the offshore income in a NZ income tax return not only results in the Government losing out on the NZ income tax that would have been paid on the offshore amounts. It can also result in an understatement of the taxpayer’s income for the purpose of calculating child support and student loan payment obligations and entitlements to Working for Families tax credits.
The IRD has identified a number of taxpayers failing to report their offshore income through their offshore bank account having a debit or credit card attached to it showing the taxpayer has used it both in NZ and offshore for goods and services.
It’s a well publicised fact the IRD is able to up the anti against avoidance or evasion activities that occur offshore by signing Tax Information Exchange Agreements (“TIEA’s”) with a number of countries, including those that are well-known tax havens. Under the TIEA’s, it’s relatively easy for the IRD to obtain details of any offshore accounts held by a NZ tax resident.
The Revenue Alert says taxpayers found to have not reported offshore income will be subject to the imposition of shortfall penalties. A shortfall penalty can be an amount equivalent to somewhere between 20% and 150% of the deficient tax ascertained as a result of the IRD investigation. Shortfall penalty reductions can occur, however, where a taxpayer has made a voluntary disclosure to the IRD or, for what is referred to as “good behaviour”, which can simply relate to it being the taxpayer’s first offence.
If the taxpayer has either never filed an income tax return for a particular income year, or has filed but failed to report income from a particular source in the return, there is effectively no time limit as to how many years the Commissioner can go back to ensure the offshore income is brought to account and NZ income taxes paid. This action could expose the taxpayer to shortfall penalties and significant use of money interest charges.
Finally, if the Commissioner determines that non-reporting of the offshore income was deliberate, criminal charges may also be laid. That could result in significant fines and/or a period of imprisonment.
If you feel issues raised by this latest Revenue Alert may apply to you, it’s recommended you seek advice to determine the correct course of action before the IRD comes knocking on your door. Our advisors would be more than happy to assist you
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