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Income Tax Act 2007

Tax credits and other credits - Tax credits for foreign income tax

LJ 5: Calculation of New Zealand tax

You could also call this:

“How to work out New Zealand tax on overseas income”

When you have income from outside New Zealand, you need to figure out how much New Zealand tax you owe on that income. Here’s how you do it:

You start by looking at each part of your foreign income separately. For each part, you use a special calculation to work out the New Zealand tax. This calculation takes into account how much of your total income comes from that foreign part, and how much tax you would normally pay in New Zealand.

If you end up calculating more tax than you would normally pay in New Zealand, there’s a way to adjust it down. You multiply each part of the foreign tax by a special ratio to make sure you’re not paying too much.

To figure out your normal New Zealand tax (called your “notional income tax liability”), you use another calculation. This one looks at your total income, takes away any losses you might have, and then applies the basic tax rate.

When you’re doing these calculations, you need to be careful about a few things:

You can’t end up with a negative amount of tax.
You need to use the correct tax year for your income and deductions.
There are specific rules about how to handle losses.
You need to use the basic income tax rate from the tax rules.

This process helps make sure you’re paying the right amount of New Zealand tax on your foreign income.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1518110.

Topics:

Money and consumer rights > Taxes

LJ 4: Meaning of segment of foreign-sourced income, or

“What counts as income from overseas for tax purposes”

LJ 6: Taxable distributions and NRWT rules, or

“Tax credits for money from trusts and foreign tax payments”

Part L Tax credits and other credits
Tax credits for foreign income tax

LJ 5Calculation of New Zealand tax

This section provides the rules that a person must use to calculate the amount of New Zealand tax for an income year in relation to each segment of foreign-sourced income of the person that is allocated to the income year.
If the person has a notional income tax liability of more than zero, the amount of New Zealand tax for the income year relating to the allocated segment is calculated using the following formula, the result of which can not be less than zero:
$((segment − person's deductions) ÷ person's net income) × notional liability.$

Where:
In the formula in subsection (2),—
segment is the amount of the segment of foreign-sourced income for the income year:
person's deductions is the amount of the person's deduction for the tax year corresponding to the income year that is attributable to the segment of foreign-sourced income:
person's net income is the person's net income for the tax year corresponding to the income year under section BC 4(1) to (3) (Net income and net loss):
notional liability is the person's notional income tax liability for the income year under subsection (5).

Subsection (4B) applies for the income year when the total amount of New Zealand tax for all segments of foreign-sourced income of the person calculated under subsection (2) is more than the notional income tax liability.
Each amount of New Zealand tax calculated under subsection (2) in relation to each segment of foreign-sourced income is adjusted by multiplying the amount by the following ratio:
$person's notional income tax liability ÷ NZ tax.$

Where:
In the formula in subsection (4B), NZ tax is the amount given by adding together the result of the calculation under subsection (2), for each segment of assessable income from all sources, including assessable income sourced in New Zealand.
For the purposes of this section, a person’s notional income tax liability for a tax year is calculated using the formula—
$(person’s net income − losses) × tax rate.$

Where:
In the formula in subsection (5),—
person’s net income is the person’s net income for the tax year:
losses—
1. is the amount of the loss balance carried forward to the tax year that the person must subtract from their net income under section IA 4(1)(a) (Using loss balances carried forward to tax year):
2. must be no more than the amount of the person's net income:
tax rate is the basic rate of income tax set out in schedule 1, part A (Basic tax rates: income tax, ESCT, RSCT, RWT, and attributed fringe benefits).

Compare

2004 No 35 s LC 14

Notes

Section LJ 5(1) heading: substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(1): substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(2) heading: substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(2): substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(3) heading: substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(3): substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(3)(c): amended (with effect on 1 April 2008 and applying for the 2008–09 and later income years), on 30 June 2014, by section 133(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
Section LJ 5(4) heading: substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(4): substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(4B) heading: substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(4B): substituted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(4C) heading: inserted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(4C): inserted (with effect on 1 April 2008), on 29 August 2011 (applying for the 2008–09 and later income years), by section 101(1) of the Taxation (Tax Administration and Remedial Matters) Act 2011 (2011 No 63).
Section LJ 5(6)(b): substituted (with effect on 1 April 2008), on 6 October 2009, by section 338(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
Section LJ 5(6)(c): amended, on 1 April 2008, by section 562 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
Section LJ 5 list of defined terms New Zealand: inserted (with effect on 1 April 2008), on 6 October 2009, by section 338(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).