In the income tax area, agreements between two countries are known as Double Taxation Agreements (DTAs). They are designed to prevent double taxation for cross border transactions, meaning: nobody who has income from other countries should be worse off than people who earn money and pay taxes in their country of residence. It provides taxpayers with an at least equal, sometimes even better treatment than they would get under a country's domestic law.
Andrew Smith, an international tax expert from Victoria University in Wellington, describes DTAs as a "shield, not a sword". He says: "Double Tax Agreements cannot create a tax liability when there is no underlying provision in the domestic law of one of the states."
Depending on the individual agreement, overseas income or a portion of this income might be taxed in the country where the money is paid; in this case the already taxed income can be deducted from the tax debt in the country of residence. In other cases you can obtain exemptions from paying taxes overseas and have to declare the complete overseas income in your country of residence and pay full tax there.
No Double Taxation Agreement is like the other
Another important factor is in which country you spend most time, meaning: you might have to pay taxes in New Zealand only if you reside there more than 183 days in the tax year. There are scores of variants that cannot be dealt with in detail in this article.
It is only meant to show that you have to study the Double Taxation Agreement New Zealand has with the specific country you earn money in. The rules can be complicated, so speak to Inland Revenue (IRD) and/or a tax consultant, specialising in international taxation.
Those DTAs also include regulations about the taxation of overseas pensions - and they could not be more different and more complicated.
The first problem already arises because of the nature of overseas pensions: Are these pensions universal state pensions? Are they state pensions for civil servants? Are they contributory pensions? And finally, has the respective overseas state a Social Security Agreement (SSA) with New Zealand?
International agreements override domestic law
Whereas most overseas countries have Double Taxation Agreements with New Zealand and they generally work well, only eight states have Social Security Agreements with New Zealand (and we would not count Jersey and Guernsey as independent states) as a reaction to New Zealand's treatment of overseas pensions. SSAs are dreaded because they can make a retiree worse off than if he/she was treated under domestic law.
No DTA has much resemblance to any other, so study the section about pensions carefully. It can mean a lot of money.
At the Overseas Pensions Forum in Auckland in 2010, for example, we found out by coincidence that New Zealand's IRD has been taxing German pensions for years and years, although only certain state pensions for civil servants are taxable in New Zealand. The DTA between these countries clearly states that only the state that pays the pension can tax it, in this case: Germany.
As an excuse for the IRD workers who breached this DTA we would accept that it is impossible to know each DTA by heart. But a serious question must be raised, as to why IRD's software is not designed to automatically exempt German pensions from taxation.
Read "your" DTA and apply for reassessment when laws were breached
As a reaction to this "news" - which is, of course, not a new regulation as the DTA dates back to 1980 - several pensioners with German pensions went to IRD and applied for a reassessment of their tax returns.
We have heard of several cases where applicants got overpaid taxes back. (But also of one case where the chartered accountant hired by an affected pensioner did not understand the DTA...) The relevant information can be found on page 21 of an IRD Tax Information Bulletin from September 1995.
There is no way to apply domestic law - which in New Zealand means that pensions (NZ Super) are taxed -, as international law, in this case the DTA, overrides national law.
Read the DTA New Zealand has signed with Canada, and you will find a lot more text written in far more complicated legalese. Fact is that New Zealand can tax Canadian pensions, and Canada can tax amounts higher than C$ 10,000 a year. Plus more detailed regulations...
The DTA with the USA says that the state of residence (in this case: New Zealand) has the right to tax purely employer-funded pensions. The employer/employee-funded pension (US Social Security), however, is considered a government pension which can only be taxed at source in the USA and not in New Zealand.
We surely are willing to publish the chapters about the taxation of overseas pensions New Zealand has with other countries on this page. So if you have these paragraphs available, please send them to us - including a translation into plain English, so we can have a look and double-check them.
Double Taxation Agreements (DTAs)
1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State shall, subject to the provisions of paragraph 2, be taxable only in that other State.
2. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may also be taxed in the State in which they arise, and according to the laws of that State in any taxation year or income year where they exceed the sum of 10,000 Canadian dollars in that year; provided that the tax so charged shall not exceed
a) In the case of pensions, the lesser of
(i) 15 percent of the gross amount of the payment, and
(ii) the rate determined by reference to the amount of tax that the recipient of the payment would otherwise be required to pay for the year on the total amount of the payment received by him in the year, if he were a resident in the Contracting State in which the payment arises.
b) In the case of annuities other than payments of any kind under an income-averaging annuity contract, 15 percent of the amount of the payment or payments that are subject to tax in that State.
3. The competent authorities of the Contracting State may, if necessary, agree to modify the sum mentioned in paragraph 2 as a result of monetary or economic developments.
4. In this Article the term "annuities" means stated sums payable periodically at stated times, during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or moneys worth.
Article 18 of the Double Taxation Agreement with the USA
1. Paragraph 1(a) gives the State of residence exclusive right to tax pensions where they are paid in consideration of past employment. However, this Article does not cover Government pensions for services rendered which are dealt with in Article 192. .
Paragraph 1(b) states that pensions and other payments made under the social security legislation are taxable only in the country paying them, ie, State of source.
A resident of New Zealand receives a pension from a previous employer who is a resident of the United States. He also receives a social security pension from the United States Government. The tax position is as follows:
2. Paragraph 2 gives the State of residence exclusive right to tax annuities.
Signposts at Cape Reinga
No NZ tax on pensions from Finland, France, Germany, the Philippines and the USA
According to its guide IR257 on "Overseas pension and annuity schemes" from May 2016 the IRD states on page 27 that:
"In a very small number of cases, New Zealand has no right to tax pension income and the income shouldn't be included in your New Zealand tax return.
This applies, for example:
Apply for a re-assessment of your tax returns
Request a re-assessment of your tax returns if your overseas pension comes from one of the above mentioned countries and if they were taxed in New Zealand. Only lately - winter/spring 2016 - several pensioners whose US Social Security pensions had been taxed in New Zealand - have received impressive refunds for overpaid taxes from IRD.
Quote page 27 in the above mentioned IRD guide IR257 pm "Overseas pension and annuity schemes" from May 2016 when you apply for a re-assessment, as well as the relevant article of the Double Taxation Agreement that applies to you (for Germany and the USA i.e. Article 18).
Don't be intimidated by the bureaucracy and sometimes threats, illegal demands (i.e. an IRD officer demanding foreign tax returns). It may take three months until you get your money back. Contact IRD on the progress from time to time, not that they forget about your case.