New Rules for Taxing Foreign
New Rules for taxing foreign superannuation transfers and lump sums
From 1 April 2014, a new set of rules replaces the previous rules applying to interests in and amounts derived from, foreign superannuation schemes.
The new rules are intended to bring greater clarity and cohesion to the taxation of foreign superannuation lumps sums and transfers making it easier for people to understand and comply with their obligations.
Many people who have transferred foreign pensions to New Zealand or who have the intention of transferring their foreign pensions to New Zealand are unaware of their tax obligations. In fact, Inland Revenue estimates that 70% of people who have transferred foreign pensions to New Zealand or made a lump sum withdrawal have not complied.
Inland Revenue have indicated to tax advisors and accountants on many occasions that they will be checking foreign superannuation transfers to ensure that taxpayers complied with the rules and we are starting to work with clients who have received audit letters from Inland Revenue.
The foreign investment fund (FIF) rules will usually cease to apply to interests in foreign superannuation schemes unless the interest was first acquired while the individual is a New Zealand tax resident or if it is grand-parented.
Instead, from 1 April 2014, interests in foreign superannuation schemes are taxed only when:
- The individual has received an amount (either as a pension or as a cash lump sum);
- A transfer has occurred into New Zealand or an Australian superannuation scheme; or
- A transfer of an interest is made to another person (unless rollover relief is available).
Lump sums received or transferred in the first four years of New Zealand tax residence are generally exempt from tax. If a person is outside the first 4 years, the lump sums received are taxed using one of two methods, the Schedule Method and the Formula Method.
The scheduling method is the default method and it is designed to approximate the tax that would have been paid on accrual while the person was a New Zealand tax resident. The formula method taxes the person based on the actual gains that have been earned by their scheme while they were a New Zealand tax resident, and is the more complicated of the two methods that apply.
4 Year Exemption Period
The new rules also provide for a four-year period during which new migrants and returning residents can receive lump sum transfers and withdrawals with no New Zealand tax to pay. This rule is similar to the transitional residency rules contained in s HR 8 of the Income Tax Act 2007.
However, unlike the transitional residency rules a taxpayer does not have to be a non-tax resident for a minimum period to qualify for the exemption period.
This exemption period is applied retrospectively; therefore if you transferred your foreign pension or foreign superannuation to New Zealand after 1 April 2014 and within 4 years of becoming a tax resident, there is generally no tax to pay. Even if you transferred after 4 years, the exemption period applies to reduce your assessable period, meaning you will pay less tax.
Low Compliance Option
The new rules also include a low-compliance option. This option is for people who received (or applied to receive) a lump sum from their foreign superannuation scheme (either as a cash withdrawal or a transfer to another scheme) between 1 January 2000 and 31 March 2014 and did not comply with their tax obligations relating to the transfer at that time.
To remedy their non-compliance in the easiest way possible, the person can include 15 percent of the lump sum received in either their 2014 or 2015 income tax return and pay tax on that amount. If they have already filed a return for these two years they will have to make a voluntary disclosure and ask Inland Revenue to amend the return.
If you transferred your foreign pension or foreign superannuation scheme into a New Zealand Kiwisaver scheme, then you will be able to request that any tax liability resulting from the transfer is met by the funds held in your scheme. Even if you did not make a transfer into a Kiwisaver scheme, other schemes may allow you to make a similar withdrawal.
If you have transferred foreign superannuation to New Zealand and have not complied with the tax rules or you are contemplating transferring your foreign superannuation to New Zealand, we suggest you contact us for a brief no-obligation chat about how we can help you meet your obligations in the most tax effective manner.