In response to my last article in Indian Newslink (August 15), there were many queries on the issue of taxability of overseas pensions received from India deposited either in a New Zealand Bank Account or in an overseas Bank Account.
Most of the readers were also confused over the definition of a Tax Resident. As some of them have Overseas Indian Citizenship, they felt that their earnings in India were taxed there and hence were not taxable in New Zealand.
Residency rules with regard to immigration are different from the Tax Residency Rules under the Income Tax Law.
Under Tax Rules, a person will be treated as a Tax Resident of New Zealand if he or she (1) is in New Zealand for more than 183 days in any 12-month period (2) has an “enduring relationship” with New Zealand or (3) is away from New Zealand in the service of the New Zealand Government.
Anyone fitting the above definition will be treated as a Tax Resident of New Zealand.
As a tax resident, that person would be required to declare all their worldwide income in New Zealand Income Tax Return, no matter whether tax has been paid overseas or not.
This is subject to the Transitional Resident Exemption, which enables New Zealand taxpayers who have migrated to New Zealand after April 1, 2006 (see Indian Newslink August 15, 2010).
It should however be noted that war pensions and certain service disability pensions paid by any Government are exempt from tax in New Zealand. Pensions other than above exempted pensions, received from India (or elsewhere), will fall into two categories. They are (a) pensions in respect of past employment and (b) any other kind of pension or annuity.
Pensions received in respect of past employment are treated as a part of salary or wages and subject to tax in New Zealand. Pensions of such nature when received by taxpayers may or may not have any tax deducted in India.
Pensions of the second kind are also clearly taxable income of a taxpayer in New Zealand.
Hence, such pension income received from India needs to be included in New Zealand tax calculations. This is applicable in cases whether the pension is received in New Zealand or India and is deposited in a bank account in India.
Any income tax deducted from the pension received in India will entitle that person to claim tax credits while declaring the income from pension New Zealand. However, the claim is limited to the amount of tax that is payable in New Zealand on the overseas pension.
The Inland Revenue Department (IRD) in New Zealand would require proof of the income tax that is deducted on the pension in India to allow income tax credit.
If the payment of pension is deposited into a New Zealand bank account, it will then be converted in to New Zealand dollars on the day of credit into a New Zealand Bank Account.
However, if the payment of pension is done in any bank account in India, the amount must be converted to New Zealand Dollars as per the prevailing exchange rate on the day on which the payment was made into the Bank Account in India. The deducted income tax must be converted to New Zealand dollars in the same way.
There may be cases where tax is not deducted on the pension amount paid.
New Zealand Tax Residents receiving such pension must arrange to pay their own tax on such income. Depending on the amount of pension, provisional tax implications may also arise. This will be clear from the following example:
Rachel (not a real name) estimates that she will receive the following income for 2010 as a New Zealand Tax Resident:
Salary from New Zealand employer $48,000
Pension from India (No tax deducted) $10,000
Total Income $56,000
Rachel will be required to pay $3300 ($10,000 x 33% tax) on her overseas pension from India. She will be required to file IR3 Income Tax Return declaring her pension from India.
The residual income tax of $3300 will be payable on or before February 7, 2011.
As her residual income tax is more than $2500, Rachel will be required to pay Provisional Tax for the 2011 Tax Year in three installments. This must paid on August 28, 2010, January 15, 2011 and May 7, 2011.
In order to avoid making the payment of her Terminal Tax and Provisional Tax, Rachel can file a special tax code application with IRD, which will instruct her employer to deduct the tax on salary income at a special rate.
Taxpayers in such situations are advised to seek professional advice so that they can avoid interest and penalties on the taxes due to New Zealand IRD.
Vijay Talekar is Director, Tax Experts Limited (Chartered Accountants), based in Auckland. The above article should be considered only as a guideline and not specific advice. Mr Talekar absolves himself along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.