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Foreign Superannuation – to bring back or not to bring back
That is the Question…
On Thursday 27th February 2014, the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill received Royal Assent, the final part of the process that brings a new piece of legislation into effect.
While also confirming the tax rates for the coming 2015 tax year, a prime focus of the Bill was the changes to the Foreign Superannuation rules.
Historically the rules have been relatively difficult to understand, one consequence of which is a higher possibility of non-compliance by taxpayers simply not aware that they had any reporting obligations with respect to their foreign superannuation scheme.
In making the changes, the Government is desirous of removing all complexity associated with the previous rules, the obvious goal being to eliminate non-compliance completely.
Under the previous rules, taxpayers may have had a reporting issue from one of two perspectives:
- Firstly that their foreign superannuation was classed as an attributing interest in a foreign superannuation scheme (as defined) and was consequently subject to annual taxation under the foreign investment fund (“FIF”) rules, or:
- Secondly that their foreign superannuation scheme was held via a foreign company or foreign trust, which did not satisfy the technical definition of being a foreign superannuation scheme and was therefore not caught by the FIF rules. The foreign company/trust then made a distribution to the taxpayer however the amount received was not returned as income by the taxpayer, either as a dividend or as a beneficiary taxable distribution.
From 1 April 2014, the new rules will come into effect and in essence taxation will be purely on a receipts basis.
The amendments will predominantly affect taxpayers who receive a foreign superannuation withdrawal. A foreign superannuation withdrawal will include a cash withdrawal or a transfer into either a NZ or Australian superannuation scheme ( Australian superannuation schemes are generally exempt from taxation under the Australia/NZ double tax treaty agreement).
The receipt of a foreign pension or a foreign social security will not be affected by the new rules as these amounts have always been subject to NZ tax based on the time of receipt.
So how will the new rules impact you or probably a more pertinent question, if you presently have a foreign superannuation scheme, what should you do with it?
- If you are still a transitional resident, then effectively the new rules have no impact on you until the expiry of your transitional residency period. However it is recommended that you utilise this four year window to reorganise your foreign investments so exposures to NZ taxation when your transitional residency period is at an end are effectively managed.
- If you are a returning New Zealander but do not qualify as a transitional resident, the new rules will still provide a four year window for you to either receive a lump sum withdrawal or transfer the foreign superannuation to a NZ/Australian scheme without having to pay any NZ tax.
- If you do not qualify under either 1 or 2 and you are looking at receiving a foreign superannuation withdrawal sometime post 1st April 2014, the amount of NZ tax you will be required to pay will depend on how long you have been a NZ tax resident (post any transitional residency period expiring) at either the time of transfer or the time of receipt. The new rules refer to this as your assessable period and applies a rate that ranges from tax being levied on 4.76% of the relevant amount if the event occurs within twelve months of you becoming a NZ tax resident, to 100% if the event occurs post 26 years from the time you became a NZ tax resident.
This method of calculation is referred to the schedule method and is the default method for the purpose of the new rules. The method approximates the income from the superannuation scheme that would have been derived by the taxpayer on an accruals basis and adds an interest component to recognise the deferral of the tax liability. An alternative method is available referred to as the formula method, however this method can only be used if certain specified criteria are satisfied.
- If you plan to leave your foreign superannuation offshore, then the new rules will not impact you until you receive a foreign superannuation withdrawal at some point in the future.
- If you plan to transfer your foreign superannuation from one foreign superannuation scheme to another foreign superannuation scheme, then again the new rules will have no impact on you until you actually receive a foreign superannuation withdrawal.
- If you have previously returned income on your foreign superannuation scheme in accordance with the FIF rules pre 1 April 2014, then for as long as you continue to do so post 1 April 2014, the new rules will not apply to you. Note that under the FIF rules, any actual receipts are not subject to NZ income tax. Note that one criteria here is that you must have first returned the FIF income in an income tax return filed pre the announcement of the new rules – 20th May 2013.
The new rules also provide an amnesty of sorts to those taxpayers who for one reason or another have not complied with their NZ income tax obligations at the time they either received a lump sum amount from their foreign superannuation scheme or they transferred their foreign superannuation to a NZ/Australian superannuation scheme.
The amnesty applies to events that have occurred during the period 1 April 2000 to 31 March 2014. An affected taxpayer will be able to correct their non-compliance by paying tax on 15% of the lump sum/transfer amount. To take advantage of this option, the relevant amount must be included in either the taxpayers 2014 or 2015 income tax return. If a taxpayer choses to use this option, then no interest or penalties will apply (unless the tax due is not paid on time). Alternatively a tax payer can choose to use the actual rules that were in effect when the receipt/transfer occurred, however to the extent the reassessment results in a tax shortfall, they will be exposed to interest and penalties.
The 15% option will still be available to taxpayers who do not act on the amnesty but are discovered by the IRD at some later date to have not complied with their obligations correctly. However the reassessment will be made to the taxpayer’s 2015 income tax return with possible interest and penalty exposures as a result.
Additionally, in a last minute amendment to the Bill, the 15% option has been extended to those taxpayers who have applied to have funds transferred prior to 1 April 2014 however as at 1 April 2014 the funds have not actually transferred. The media release accompanying the announcement of the amendment, promoted the benefit of someone on a 33% tax rate transferring their funds pre 1 April 2014, as effectively only having to pay 5% tax on the amount transferred.
As a side issue, it should be noted that any income arising either under the new rules post 1 April 2014 or as a result of the taxpayer using the 15% method, will be treated as income for the purpose of calculating working for family tax credits, child support and student loan repayment obligations.
Finally, where a person has transferred their foreign superannuation into a NZ KiwiSaver fund, usually those funds would be locked in, however Parliament has recognised that this might create hardship issues for taxpayers requiring funds to pay the taxes assessed under the new rules and as a result an amendment has been made to the KiwiSaver rules to permit a withdrawal to the extent of the taxation payable on the transferred amount.