Foreign tax credits and income with multiple sources

Section LJ 1 of the Income Tax Act 2007

Key features

Section 100 of the Tax (Tax Administration and Remedial Matters) Act 2011 amends section LJ 1(2)(a) of the Income Tax Act 2007 to ensure a taxpayer has a foreign tax credit for foreign tax paid on income sourced outside New Zealand, even if that income also has a source in New Zealand.

Detailed analysis

The Rewrite Advisory Panel agreed with a submission that, under section LJ 1(2)(a) of the 2007 Act, a New Zealand resident taxpayer is prevented, inadvertently, from receiving a foreign tax credit:

• for income sourced in another jurisdiction that is subject to an income tax in that other jurisdiction; and
• for withholding tax paid in the country in which the foreign income is sourced.

Under section LC 1 of the 2004 Act, it was possible for foreign-sourced income to be contemporaneously sourced in New Zealand. An example where this may arise is in relation to a New Zealand resident with an investment business in New Zealand that receives dividends paid from a foreign company (as part of that investment business).

Under the source rules (and associated case law) this dividend is:

• sourced in the country in which the company paying the dividend is resident; and
• sourced in New Zealand as the country in which the business is carried on.

The foreign tax credit rules in the 2004 Act permitted a taxpayer a foreign tax credit for foreign tax paid on this income.

The amendment to section LJ 1(2)(a) restores to the 2007 Act, the effect of section LC 1 of the 2004 Act.