Foreign Tax Credits – what do you need to know?

New Zealand residents are taxed on their worldwide income. If your income includes income from foreign sources, then this is subject to New Zealand tax. If you already paid tax on it overseas, you don’t want to pay tax on it twice and the system is geared to avoid that. But – as they say in the classics – it’s complicated.

If you have a New Zealand income tax liability for the relevant year, you may be entitled to claim foreign tax credits. The rules take different factors into account, including whether a Double Tax Agreement (DTA) exists for the country where you sourced your income.

If you draw overseas income from multiple sources, the calculations require the income to be segmented by what country the income was earned in and what type of income it is. Any business expenses that you incurred to earn each type of income in each country are taken into account. Then you can calculate what your notional New Zealand tax liability is.

If the amounts you paid in tax in the countries where you sourced your overseas income are more than your notional New Zealand tax liability, you won’t be able to claim foreign tax credits. If less, than you may be able to.

Different rules apply for FIF income, that is, relating to shares in overseas companies, so please talk to us to ensure tax is calculated correctly on this income.

We can help you with the calculations and advise whether you are entitled to foreign tax credits on your overseas income.