Tax Talk: November 2024

Alex has kindly passed the baton for this month’s tax update. Hopefully I can be as enlightening as he is.

It seems a lot longer than a month since we had that near-biblical deluge in Dunedin. Luckily for me, working from home means no daily commute from Taieri Mouth (about 30km south of Dunedin), which was just as well—we were completely cut off that day.

Fortunately, the weather hasn’t disrupted my training for the Kepler Challenge, a 60km ultramarathon near Te Anau. With less than six weeks to go, I’m hoping my preparation will see me through to the finish line!

On the tax front, as Alex mentioned last month, we’re in a relatively steady phase. The IRD’s recent publications and consultations have largely focused on clarifying existing rules rather than introducing new ones.

That said, what they have released is worth noting, offering insights into where the IRD’s attention is currently directed.

For more details, please read on.

– Adam

One consultation document released last week addressed a specific calculation method for FIF income. The method in question is less important than the fact that FIF income is apparently in the IRD’s sights.

So, what is FIF income? FIF stands for Foreign Investment Fund, and generally it refers to investments in foreign companies or similar entities. There’s a more technical explanation, but if you’re unsure whether you have a FIF interest, it’s a good idea to contact your friendly neighbourhood tax adviser (that’s us) to check.

If you have a FIF interest, you generally don’t pay tax on the cash returns from those investments. Instead, your taxable income from that investment is typically calculated using one of two methods—the Fair Dividend Rate (FDR) method or the Comparative Value (CV) method.

I won’t delve into how these methods work, but it’s easy to see why the average taxpayer might get this wrong, as the rules can be fairly counterintuitive. Essentially, under the FIF rules, you’re assumed to have a certain amount of income and pay tax on this fictional amount, rather than on what you actually receive in cash. Evidence suggests that many people are getting this wrong, either by returning only the cash receipts or not returning anything at all.

If you think the IRD might not notice that you’re not paying tax on income from overseas — think again. The IRD exchanges information with numerous other tax authorities, and these authorities often inform the IRD about income paid to NZ-based taxpayers.

What we’re hearing is that, based on this information from foreign tax authorities, the IRD is sending out “please explain” letters. These letters are the IRD’s version of a warning shot — come clean, or they’ll investigate more closely.

You may have heard that the IRD can’t look back further than four years (the so-called “time bar”) when auditing you. This is generally true, but if you’ve completely left out a source of income from your tax return, rather than just returned the wrong amount, this time limit may not apply. The IRD could potentially look back 10 years or more, and if you’ve left out income, you’ll not only have to pay the tax you missed, but interest and penalties could also apply.

Penalties and interest backdated over several years can add up quickly. However, there is good news — if you tell the IRD about a mistake before they audit you (a process known as Voluntary Disclosure), you’ll almost always get a much better outcome. Penalties may be significantly reduced or in most cases waived entirely. You can also negotiate repayment plans, and tax pooling is also available to help reduce interest costs.

The IRD is generally very accommodating if a taxpayer is making a genuine effort to repay a debt. They’re far less understanding if you refuse to engage with them. So, if you think you might have foreign income obligations, get in touch with us to explore your options. It’s a far better alternative than waiting for the IRD to come knocking.

Another area often misunderstood by taxpayers — and one that’s increasingly attracting the IRD’s attention — is cryptoassets (Bitcoin being the most well-known example). As with FIF income, taxpayers might be surprised at how much information the IRD has about their cryptoasset holdings through international information exchanges.

This level of scrutiny will increase significantly when New Zealand adopts the OECD’s Crypto-Asset Reporting Framework (CARF) from 1 April 2026. CARF will operate similarly to the current international information exchanges that enable the IRD to detect foreign income.

So, how are cryptoassets taxed in New Zealand? For tax purposes, they aren’t considered money or a financial arrangement. The IRD’s view is that cryptoassets are a form of property that is, in most cases, acquired solely with the intention of making a gain from disposal. This means any disposal of cryptoassets, including exchanges for other cryptoassets, will normally be taxable.

Whether cryptoassets are always held to sell for profit is debatable. However, unless there’s a specific reason for acquiring them (such as “staking” where cryptoassets might generate income from being held rather than on disposal), it’s a difficult position to argue against.

What does this mean? In short, any time you sell cryptoassets — whether converting them to a fiat currency like NZD or exchanging them for other cryptoassets — the IRD considers it a taxable event. If you make a gain, it’s taxable; if you incur a loss, it’s deductible.

The challenge lies in calculating gains or losses, as you need to convert the amounts paid and received into NZ currency on the respective transaction dates.

You can see where this is headed. If you have a few transactions involving a well-known cryptocurrency, this might be straightforward. However, if you’re regularly trading and exchanging between different cryptoassets, as well as converting to or from NZD or foreign currencies, it can become very complex.

As with FIF income, if you have cryptoasset income that hasn’t been disclosed to the IRD, it’s much better to report it before they discover it. Some cryptoasset brokers can generate tax reports to help with these calculations. However, it’s important that you can verify that these reports are accurate, as you’re responsible for the information you include in your tax returns. If you need help understanding your cryptoasset obligations, come and talk to your friendly neighbourhood tax accountants.

As always, don’t hesitate to reach out if you’d like help to work through the implications of any of these changes.

Alex Cull, Tax Partner
[email protected]

Tax law is always changing.

If you’re reading this long after the published date, please get in touch to see if it’s still relevant.