20 May 2013
Dunne: foreign super and mining tax rules to change
Proposals to reform the tax treatment of foreign superannuation and bring the tax treatment of gold, silver and ironsands mining into line with other economic activities are the centrepieces of a tax bill introduced in Parliament today, Revenue Minister Peter Dunne has announced.
He said the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill would make the rules for taxing foreign superannuation simpler and fairer for New Zealanders returning after working overseas and for migrants who have contributed to overseas superannuation schemes before coming to New Zealand.
“The current rules for taxing New Zealand residents on their foreign superannuation are complex and can be difficult to understand.
“For example, a person with an interest in a foreign superannuation scheme might be taxed on accrual under the foreign investment fund rules, while someone else might be taxed upon receipt of a lump-sum payment.
“As a result, some people pay more tax than others depending on how the foreign scheme is structured. This bill provides a much simpler and more even-handed approach,” Mr Dunne said.
Under the proposed changes, the foreign investment fund rules will no longer apply to foreign superannuation schemes. Instead, lump sums from foreign superannuation schemes will be taxed when they are withdrawn or transferred to a New Zealand or Australian scheme.
The amount of tax will depend on how long a taxpayer has been New Zealand resident, using one of two calculation options.
Periodic pensions will not be taxed under either of these methods, but will be taxed in full on receipt, as most periodic pensions currently are.
Mr Dunne said the Government had also taken steps to ensure that transitional and practical matters arising from the proposed new rules were dealt with in the bill so taxpayers would not be disadvantaged. These include:
- Making it easier to meet tax obligations, with those transferring their foreign superannuation scheme interests into KiwiSaver being allowed to make a withdrawal from the KiwiSaver scheme to pay their tax bill.
- Those who complied with the foreign investment fund (FIF) income rules in relation to their foreign superannuation before the introduction of the bill today (20 May 2013) may choose to use the FIF rules in relation to that interest after 1 April 2014.
- In addition, those who have made a lump-sum withdrawal or a transfer to another superannuation scheme between 1 January 2000 and 31 March 2014, but did not comply with their tax obligations at the time, will have an option to pay tax on only 15 percent of the lump sum amount.
The proposed changes to the tax treatment of foreign superannuation are to come into effect from 1 April 2014.
Mr Dunne said these and other measures in the bill were “a continuation of Government’s work in rationalising the tax system”.
He said changes to the mineral mining rules would more closely align the tax treatment of miners of specified minerals such as gold, silver and iron sands with that of taxpayers more generally by removing immediate tax deductions, or in some cases tax deductions in advance, for expenditure that other taxpayers are required to capitalise and depreciate over the useful life of the asset.
“Mining is an important sector, but we must ensure that tax rules do not advantage one sector over another,” Mr Dunne said.
The proposed changes to mineral mining will apply from the beginning of the 2014–15 income year.
Other measures in the bill include:
- clarifying the minimum financial reporting requirements for certain companies
- changes to the tax rules relating to bad debt deductions for holders of debt, to make them fairer
- changes to the general and life insurance business tax rules to ensure they work as intended; and
- further improving the integrity of the Working for Families tax credit provisions.
More information on the changes is available on Inland Revenue’s tax policy website, www.taxpolicy.ird.govt.nz
Mark Stewart | Press Secretary | Office of Hon Peter Dunne
Cell +64 21 243 6985
The current rules for taxing people who move to New Zealand on their foreign superannuation can be complex and difficult to understand, and do not always result in a fair outcome. Some people who have interests in foreign superannuation, or who have withdrawn or transferred their foreign superannuation interests in recent years, have not complied with their New Zealand tax obligations. To address these issues, new rules for taxing foreign superannuation are proposed in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill. The proposed new rules are intended to be simpler and easier to comply with than the current rules.
The information in this factsheet is for people who:
- withdraw their foreign superannuation between 1 January 2000 and 31 March 2014 (including transfers to New Zealand or overseas superannuation schemes); or
- have filed an income tax return declaring foreign investment fund (FIF) income or loss for an interest in a foreign superannuation scheme before 20 May 2013.
Other taxpayers who have not withdrawn their foreign superannuation do not have to do anything until they make a withdrawal or transfer.
- For people who have not met their tax obligations, a transitional provision is proposed to allow people to meet their past tax obligations by paying tax on 15% of the amount transferred or withdrawn.
- For people who have previously complied with the FIF rules in relation to a foreign superannuation interest “grandparenting” provisions are proposed which will allow those rules to continue to be available under certain conditions.
15% rate option for withdrawals from 1 January 2000 to 31 March 2014
A withdrawal from a superannuation fund is a taxable event. Withdrawals include transfers to another superannuation scheme in New Zealand or overseas. The proposed legislation contains a transitional provision to help people who have not met their tax obligations in the past to comply with those obligations, that is, paying the required tax on the withdrawal or transfer.
The proposed transitional provision will allow people to meet their past tax obligations by paying tax on 15% of the amount transferred or withdrawn. The remaining 85% of that sum will not attract income tax. In order to qualify for this transitional provision, the taxpayer will need to disclose their failure to comply.
This option will be available for transfers or withdrawals from 1 January 2000 to 31 March 2014. Taxpayers can choose to calculate their tax liability under the 15% rate option or under the existing law.
Under the 15% rate option the income must be included in the person’s tax return for either of the 2013–14 or 2014–15 income years. The due date for tax will be the corresponding 2013–14 or 2014–2015 income year in which the lump sum is included. Paying the tax on this amount will satisfy their income tax liability for that transfer or withdrawal. Penalties and interest will not apply from the income year in which the income should have been included in their tax return.
People who have complied with the existing law and paid the associated tax will not be able to reassess their position using the 15% option.
If the person does not use the option to pay tax on 15% of the amount, then they must apply the law as it applied at the time that they made the withdrawal.
For example, a person could choose to apply the available subscribed capital rules (if allowed under the law at the time) if they think that it will result in a lower tax liability than tax under the 15% inclusion option – perhaps because all or the majority of the transfer will be a return of capital rather than a dividend. The original due date would still apply if there is a positive amount of income under reassessment. This means that any relevant penalties and use-of-money interest will apply from the income year in which the transfer or withdrawal occurred.
Further information about the process for disclosing past withdrawals will be available on Inland Revenue’s website in due course.
15% rate option - example 1:
Jenny transferred $150,000 from her foreign superannuation scheme to a New Zealand scheme in February 2004. She did not include this income in her IR3 return for the 2003–04 income year, and did not pay tax on the interest under the FIF rules.
She decides to use the 15% option for her lump sum transfer. She discloses the non-compliance and declares $22,500 (being 15% of $150,000) as income in her IR 3 return for the 2014–15 income year.
Jenny will be liable for any penalties or use-of-money interest in relation to her 2014–15 tax return, not her 2004–05 tax return.
15% rate option - example 2:
Catherine transferred $150,000 from her foreign superannuation scheme to a New Zealand scheme in February 2004. She did not include this income in her IR3 return for the 2003–04 income year, and did not pay tax on the interest under the FIF rules.
She decides to use the law as it applied at the time that she made the withdrawal to calculate the tax on her lump sum transfer. In her situation, the majority of her $150,000 was a return of capital, and only $2,000 of the amount is income. She has her 2003–04 IR 3 return amended to include the $2,000.
Catherine will be liable for penalties and use-of-money interest from the 2003–2004 income year.
Application of the foreign investment fund rules after 1 April 2014
Generally, the bill proposes that the foreign investment fund (FIF) rules will no longer apply to interests in foreign superannuation schemes. However, “grandparenting” provisions will apply to certain taxpayers who have previously complied with the FIF rules in relation to a foreign superannuation interest. “Grandparenting” means that the FIF rules will continue to be available if a number of conditions are met.
A taxpayer must have filed an income tax return including FIF income or loss for an interest in a foreign superannuation scheme before the introduction of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill (that is, by 20 May 2013). This does not have to be the most recent income year, but can be any previous income year.
Grandparenting will be available on an interest-by-interest basis. If a taxpayer has interests in more than one superannuation scheme but has only returned FIF income in respect of one of the interests, the taxpayer will only be grandparented in relation to that interest.
To elect to be grandparented in relation to a foreign superannuation interest, a taxpayer must continue to include FIF income or loss for that interest in their income tax return for all income years ending after 1 April 2014. If a taxpayer fails to do so for any income year, they will no longer be grandparented. They will then be required to account for income tax on any lump sums received from the scheme under the proposed new rules.
Once a taxpayer has lost their grandparented status in relation to an interest, they cannot regain it.
These proposed changes are included in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill introduced on 20 May 2013 and will apply from the 2014-15 income year.