There's major changes in the wind for those bringing pension entitlements to New Zealand. This is particularly relevant for new immigrants to New Zealand or people returning after working overseas.
Our merger with Deloitte to lead the Deloitte Private team in Wellington means we have access to the experts and below is their take on the new rules and how they might affect you.
A bill called the Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill (“the Bill”) that will apply from 1 April 2014 sets out new rules to tax interests in foreign superannuation schemes.
While the Bill is still working its way through Parliament and is yet to be enacted, the changes to the taxation of Foreign Superannuation include an opportunity to take action before 1 April 2014 that may have significant positive (or negative) implications depending on your personal circumstances.
Specifically, in certain instances you may be able to withdraw a lump sum or transfer your entitlements to a New Zealand or Australian scheme before 1 April 2014 and cap your taxable income at 15% of the amount transferred or withdrawn. Given the window of opportunity to make the transfer before 1 April 2014 is fast running out some key decisions are needed quickly.
Background to the Rules/Overview
While there have been some welcomed tweaks to the rules as a result of further submissions on the proposed legislation such as introducing concessions from the full scope of the rules where entitlements pass on death or marriage breakup, the rules as set out in our June 2013 Tax Alert remain unchanged, and as such we do not look to recap the rules in detail here. In summary the new rules will apply from 1 April 2014 and the existing Foreign Investment Fund (“FIF”) rules will cease to apply (unless grandfathering provisions apply). From 1 April 2014 any lump sum receipts or transfers made into a New Zealand or Australian superannuation scheme will be taxed using either the schedule method or the formula method. Pensions will be taxed on a cash receipts basis.
Readers may recall that in order to deal with the high levels of prior non-compliance with the existing rules, under the new rules a concession has been included for withdrawals or transfers made prior to 1 April 2014 to allow taxpayers who have not complied with the current rules to treat 15% of amount transferred or withdrawn as deemed income in the 2013-14 or 2014-15 income year.
Under this concession no penalties or interest will be applied from the tax year the withdrawal or transfer was made. The concession will also remain available after the 2015 tax year in respect of transfers made prior to 1 April 2014, however interest and penalties will apply where the income has not already been returned.
If taxpayers choose not to use this concession, the law is applied as at the time of the withdrawal and the original due date for any payment of tax will apply.
Any transfers or lump sum withdrawals made after 1 April 2014 will be taxed under the new rules and depending on the length of time the recipient has been in New Zealand, the transfer or lump sum withdrawal could be taxed in full.
What does this mean for you?
Already made a transfer or lump sum withdrawal?
The action required for taxpayers who have already transferred their foreign superannuation entitlements to a New Zealand or Australian scheme, or have made a withdrawal, is clear. You will need to consider whether you have complied with the existing rules or not and where there is non-compliance you may need to include 15% of the amount transferred as taxable income in your 2014 or 2015 income tax return. In some cases, however, it may be better to return income under the FIF rules, for example, if under the FIF rules the CV method could have been adopted or an exemption was available, little or no taxable income may have arisen for a number of years such that potentially only one year’s income under the FDR method may need to be returned, which could be less than the “concessionary” 15% rule.
It is important not to act too hastily however, and advice should be sought regarding compliance with the existing rules as in some circumstances there may be full compliance with the FIF rules where no income has been required to be returned, and if this is the case you may be able to continue to apply the FIF rules going forward which would mean a lump sum withdrawal or transfer would not be separately taxed.
Do you currently have foreign superannuation entitlements?
Taxpayers who have not previously complied with the FIF rules and still have foreign superannuation entitlements which have been acquired while non resident have a window of opportunity between now and 1 April 2014 to transfer their entitlements or make a lump sum withdrawal from the fund and cap their taxable income at 15% of the amount withdrawn or transferred. For example, if someone has been non-compliant for a number of years and is about to retire in New Zealand, triggering a transfer before 1 April 2014 may result in only 15% of the fund value being taxed whereas if they wait until after 1 April 2014 a significantly higher part of the fund value may be taxable.
While on the face of it this may seem like an attractive opportunity, and for some it will be, there are a number of factors that should be considered prior to making any decisions to withdraw or transfer entitlements and ultimately the best decision for you will be dependent on your personal circumstances.
While not exhaustive we outline some of the relevant factors to consider below:
- Have the FIF rules been correctly applied in the past?
Taxpayers who have previously complied with the existing FIF rules can opt to continue to have their foreign superannuation schemes taxed under the FIF rules. This would mean transfers and withdrawals are not taxed under the new rules, and the taxpayer would continue to pay tax on an accruals basis each period in respect of their investment.
Based on a taxpayer’s personal circumstances, remaining in the FIF rules may give rise to the most beneficial outcome from a financial perspective, as income tax paid on FIF income already returned is not factored into the calculations under the formula or schedule method.
By way of example, a taxpayer with a qualifying interest in a foreign superannuation scheme who has been present in New Zealand for a long period of time, who plans to retire here within the next few years and who has complied with the FIF rules to date can opt to continue applying the FIF rules, and therefore would not be taxed on any withdrawals or transfers under the new rules. Should this taxpayer choose to opt out of the FIF rules and apply the new rules, 100% of the amount withdrawn could be taxable here (even though tax has been paid on deemed income).
Importantly, the answer to this question is not a simple one having regard to the nature of the exemptions that could apply, the methodologies used to calculate income and the disclosures required and for this reason professional advice should be sought before either ruling out the FIF rules as a valid option or seeking to continue to apply them.
- Does the beneficiary plan to retire in NZ?
It is worthwhile highlighting that if a migrant taxpayer does not intend to retire in New Zealand, as long as they do not withdraw any lump sums or transfer any amounts to a New Zealand or Australian scheme while New Zealand tax resident, they would not be taxed on their foreign superannuation fund for the duration of their tax residency under the new rules.
For example, a person who plans to retire overseas may decide to stop using the FIF rules on the expectation that they will not make any withdrawals / transfers while New Zealand tax resident and therefore have no further New Zealand tax to pay in relation to the foreign superannuation fund.
- How will the tax liability be funded?
The new rules will allow people who transfer their entitlements to a KiwiSaver scheme to withdraw funds from the KiwiSaver scheme to settle the tax liability arising. In some instances, such as with transfers from some UK schemes, any transfers have to be locked up so any withdrawal from the KiwiSaver account would need to be from other contributions and not the sum transferred, or else there could be penal tax implications triggered in the other state due to making early withdrawals.
The provisional tax rules may also need to be considered.
Act quickly, but cautiously
In essence, taxpayers now have a limited window within which to determine their liability under the old rules and under the new concessionary measures, and determine which course of action gives rise to the best outcome in their circumstances. Unfortunately there is no single answer to what course of action you should take as the best choice will depend on your personal circumstances, including the financial implications of switching investments.
Given the complexity of some of the matters to consider it is important that professional advice is sought and no decision is made before fully considering the issues and assessing the impact of any decisions. For more guidance or to discuss the application of the new rules in further detail please contact us.