Foreign tax credits and income with multiple sources
2011 amendment to Income Tax Act ensures taxpayer has a foreign tax credit for foreign tax on income sourced outside NZ, even if that income has a source in NZ.
Section LJ 1 of the Income Tax Act 2007
Section 100 of the Tax (Tax Administration and Remedial Matters) Act 2011 amends section LJ 1(2)(a) of the Income Tax Act 2007 to ensure a taxpayer has a foreign tax credit for foreign tax paid on income sourced outside New Zealand, even if that income also has a source in New Zealand.
The Rewrite Advisory Panel agreed with a submission that, under section LJ 1(2)(a) of the 2007 Act, a New Zealand resident taxpayer is prevented, inadvertently, from receiving a foreign tax credit:
- for income sourced in another jurisdiction that is subject to an income tax in that other jurisdiction; and
- for withholding tax paid in the country in which the foreign income is sourced.
Under section LC 1 of the 2004 Act, it was possible for foreign-sourced income to be contemporaneously sourced in New Zealand. An example where this may arise is in relation to a New Zealand resident with an investment business in New Zealand that receives dividends paid from a foreign company (as part of that investment business).
Under the source rules (and associated case law) this dividend is:
- sourced in the country in which the company paying the dividend is resident; and
- sourced in New Zealand as the country in which the business is carried on.
The foreign tax credit rules in the 2004 Act permitted a taxpayer a foreign tax credit for foreign tax paid on this income.
The amendment to section LJ 1(2)(a) restores to the 2007 Act, the effect of section LC 1 of the 2004 Act.