IRD puts faith in people's honesty

The Inland Revenue Department says it will rely mostly on people's honesty to comply with the new tax on foreign share investments, which experts say will be tough to police.

The proposed new tax announced last week, which comes into force from April next year, means individuals will for the first time be taxed on capital gains on foreign share investments.

Tax commissioner David Butler said the Inland Revenue Department would begin with an education campaign before it starts policing payment of the new tax.

"The onus is on the taxpayer to disclose their income and I think you'll find the vast majority of people in New Zealand will absolutely do the right thing," Butler said.

"It'll be some time down the track before we start looking at risks and where our priorities ought to be."

Asked how the IRD could discover if an individual had foreign shareholdings, Butler said the IRD can swap information with other countries and monitor money coming in and out of New Zealand.

"Unfortunately some people will deliberately, wilfully go out of their way not to pay their tax and those sort of people, something will happen and they'll get caught, and when they do they'll get penalised."

Pricewater-houseCoopers tax partner John Shewan said it was "not easy to find out" if individuals owned foreign shares, but people were more likely to fail to pay the new tax because of ignorance than avoidance.

"There'll be more people paying tax on offshore investment income than previously and the calculations are slightly more complicated so you would anticipate as the result of those two factors some non-compliance."

"At the end of the day with the pretty rigorous penalty regime that New Zealand has in place people would be well advised to try and comply."

Deloitte tax partner Thomas Pippos said some people would have trouble understanding that they would have to pay tax on unrealised capital gains under the new proposal.

"What you're trying to do is to tax people on things they don't think of themselves as income," he said. "They wouldn't think in their wildest dreams that this is the way you tax incomes."

The new tax only applies to individuals with foreign share investments worth over $50,000 or to couples with foreign share investments over $100,000. The Government estimates it will affect between 10,000 and 20,000 people.

The cut-off level should mean that most people who are subject to the tax have professional tax advice and so would file returns, said Pippos.

"Once you get a portfolio of a million dollars, say, it probably suggests that you've got sufficient financial acumen and other interests that you might get professional assistance in meeting your tax obligations.

"That is likely to be the best policing mechanism we've got that these measures are actually complied with."

Financial adviser Brent Sheather said very wealthy investors would be able to avoid the tax by leaving their portfolios offshore indefinitely, because any accumulated capital gains tax is eliminated at death.

"On the other hand, Mum and Dad with $200,000 who need the lower risk of international diversity more than most can't afford to fire and forget their non-Australian portfolio as they will need to progressively draw it down for retirement income," he said.

"The proposal thus attacks middle New Zealand more than the rich."

The proposed tax does not apply to Australian shares.