Tax area easy to overlook

By DENHAM MARTIN

I am a New Zealand resident and have been since I emigrated here from Singapore in 1995.

I own 5000 shares (5 per cent ) in a family company, incorporated and based in Singapore, and get dividends from these shares annually. I believe the shareholding is worth about NZ$50,000.

I also own shares in a listed United States company that are worth about NZ$70,000.

I have always returned the dividend income I receive from the shares, but I have recently been told by an adviser that I may need to disclose the shareholdings to the Inland Revenue Department.

Is this correct? Please advise.

PF, Auckland

New Zealand's foreign investment fund regime is one of the most overlooked areas of tax compliance.

This regime potentially applies to New Zealand tax residents holding non-controlling interests in foreign entities. The entities may be companies, unit trusts, superannuation funds or life insurance policies.

The regime was enacted to prevent New Zealand residents from accumulating wealth in offshore countries, particularly tax havens, and avoiding paying New Zealand income tax on those investments.

Clearly you have interests in foreign entities, the Singaporean and United States companies, which could constitute interests in foreign investment funds and be caught by the regime.

There are, however, exemptions that could render your interests excluded from the foreign investment fund regime. Excluded are interests in entities resident in particular countries with similar taxation regimes to New Zealand -- namely Australia, Canada, Germany, Japan, Norway, Britain and the United States (known as grey list countries).

This would therefore exclude your shareholding in the United States company from being an interest in a foreign investment fund.

The rationale behind this exemption is that the tax regimes in place in these countries are of a similar level of comprehensiveness to that of New Zealand and, given that a credit would be given for taxes paid, New Zealand would collect little revenue by taxing those interests.

Also excluded are interests in entities in countries with strict exchange controls (given the difficulty in repatriating the funds), interests which are caught by the controlled foreign company regime, interests held by natural persons with an aggregated value of less than NZ$20,000, certain interests in employment-related superannuation schemes, certain private annuities and interests of new residents in superannuation schemes or life insurance policies, for their first four years of residence.

It appears your shareholding in the Singaporean company would not fall under any of these exemptions and the shares you hold would be an interest in a foreign investment fund for tax purposes.

Ascertaining that you have an interest in a foreign investment fund has two consequences.

First, it means you need to disclose the interest to Inland Revenue on the required form and file it with your tax return for the year and for the previous years you held this interest and were resident in New Zealand.

There are some limited exemptions to the requirement to disclose your interest, but these would not apply to you.

The shares in the United States company would not need to be disclosed as they do not constitute an interest in a foreign investment fund.

Second, you will have a New Zealand tax liability by virtue of your shareholding, calculated by applying one of four different accounting methodologies available.

The effect of these rules is that you are taxed on the gain in the value of your shareholding, even though any gain in that value may be unrealised.

By the same token, unrealised losses in value can be attributed to you, with certain exceptions.

Which methodology you choose depends on several factors, including whether the company is listed on a recognised exchange, the size of your interest, how much information is available to you as a shareholder and the accounting principles applied in the calculation of the company's own tax liability.

Finally, you should be aware that if you have paid tax on your interests in Singapore, including non-resident withholding tax on dividends, these taxes may be able to be credited against your New Zealand tax liability.

Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.