RA 11/03
Issued
2011

Revenue Alert

2011 Revenue Alert considers NZ tax residents accessing income held in an offshore bank account using an offshore credit or debit card.

Explanation: Status of Release

A Revenue Alert is issued by the Commissioner of Inland Revenue, and provides information about a significant and/or emerging tax planning issue that is of concern to Inland Revenue. At the time an Alert is issued risk assessments will already be underway to determine the level of risk and to consider appropriate responses.

A Revenue Alert will identify:

  • the issue (which may be a scheme, arrangement, or particular transaction) which the Commissioner believes may be contrary to the law or is inconsistent with policy;
  • the common features of the issue;
  • our current view; and
  • our current approach.

An Alert should not be interpreted as being Inland Revenue's final position. Rather, an Alert outlines the Commissioner's current view on how the law should be applied. For any Alert we issue it is likely that some investigatory work has already been carried out.

If people have entered into an arrangement similar to the one described or are thinking about it, they should talk to their tax advisor and/or to Inland Revenue for advice about tax implications.

ISSUE: New Zealand tax residents accessing income held in an offshore bank account using an offshore credit or debit card

New Zealand tax law requires a New Zealand tax resident to return and pay tax on their worldwide income.

Inland Revenue is aware of New Zealand tax residents who may have taxable offshore income held in an offshore bank account, and this income may not be returned in New Zealand for income tax purposes. As well as paying less income tax, people who conceal income offshore will also pay less child support; decrease their student loan repayment obligation; and may claim a larger entitlement to Working for Families Tax Credit (WfFTC) than they should.

Features

Inland Revenue is aware that some New Zealand tax residents hold credit or debit cards that have been issued by a foreign bank and these cards are being serviced by funds held in an offshore bank account. Inland Revenue is concerned that those people may be accessing funds in an offshore bank account without bringing the funds to account in the New Zealand tax system. The types of funds that are deposited into these bank accounts vary and include income paid by a non-resident employer, overseas life insurance policies, superannuation schemes, or equity investments held in portfolio accounts.

The arrangement that Inland Revenue is concerned with typically entails:

  • A New Zealand tax resident who has access to an offshore bank account;
  • Funds are held in, or income is received into, this offshore bank account;
  • Funds in the offshore bank account may be accessed using a credit card or a debit card issued by the foreign bank. This card can be used in New Zealand or overseas;
  • The funds or income in the offshore bank account are not returned in New Zealand for income tax purposes; and
  • This may also mean that these funds and income are not accounted for when calculating that person's child support liability, student loan repayment obligations, or entitlement to WfFTC.

Inland Revenue has also found that some people are structuring their affairs by using entities such as offshore trusts, foundations and companies to make the income appear to be outside the New Zealand tax system.

Current view

New Zealand tax law requires a person to return and pay tax on all of their income, including any income sourced offshore and received into an offshore bank account, if the person is a New Zealand tax resident at the time that income is derived.

For tax purposes, a person may still be a New Zealand resident even though that person is absent from New Zealand.

Those New Zealand tax residents who have failed to return their offshore income are likely to incur shortfall penalties. However, the shortfall penalties may be reduced if the person makes a full voluntary disclosure to Inland Revenue.

Further, those who qualify for WfFTC are required to declare all of their income and to make the appropriate adjustments to their net income when calculating the amount of entitlement, including income received into the offshore bank account.

A New Zealand tax resident who deliberately diverts their income into an offshore bank account to evade or avoid the payment of tax; or to claim a greater amount of WfFTC, will be committing one or more criminal offences under the Tax Administration Act 1994. These offences include knowingly providing altered, false, incomplete or misleading information (including on tax returns and forms), and tax evasion. A person convicted of these offences may be subject to a fine or imprisonment or both.

Current status

Inland Revenue is carrying out audits on a number of New Zealand tax residents who have offshore credit or debit cards and who have been found to hold offshore bank accounts or receive offshore income. Shortfall penalties, late payment penalty and use of money interest will be imposed where appropriate.

Investigations are also being carried out to determine if a person is using the arrangement described in this Revenue Alert to evade or avoid New Zealand tax.

Inland Revenue has signed Tax Information Exchange Agreements ("TIEA's") with a number of jurisdictions, including tax havens - those jurisdictions that have zero or low taxation rates and have been used by New Zealand tax residents in the past to conceal their income. The TIEA's will enable Inland Revenue to obtain more information about international transactions and to identify the existence of any offshore bank accounts held by a New Zealand tax resident.

Going forward

Those New Zealand tax residents that have income in an offshore bank account are encouraged to make a full voluntary disclosure to Inland Revenue or discuss with their tax advisor about making a voluntary disclosure.

Inland Revenue will continue to expand our network of TIEA's and continue to work with our treaty partners towards global tax co-operation.

References to consider

The following references will help customers:

Standard Practice Statement 09/02 Voluntary Disclosure

IR 280 Putting your tax returns right

Questions We've Been Asked "Section OE 1(1) Income Tax Act 1994 - Determination of residence of a person other than a company" (Tax Information Bulletin Vol 11, No 10, November 1999)

Tax Information Bulletin Vol. 7, No. 1, July 1995 "Determining a person's permanent place of abode"

Media releases "Inland Revenue sets sights on undeclared offshore income", 1 July 2010
Date issued: 10 October 2011
Authorised by Graham Tubb
Group Tax Counsel
Assurance
Contact (via email) revenue-alerts@ird.govt.nz
Media queries: barbara.crocker@ird.govt.nz
(04) 890 1698