Summary of proposed amendments
The bill amends the KiwiSaver Act 2006 and the Income Tax Act 2007 to give effect to trans-Tasman portability of retirement savings. The portability arrangements will allow a person who has retirement savings in both Australia and New Zealand to consolidate them in one account in their current country of residence. The amendments remove an impediment to labour movement between the two countries, as retirement savings are currently unable to be transferred if a person permanently emigrates to the other country.
Application date
The portability arrangements will come into effect up to two months after New Zealand and Australia have exchanged notes informing each other that the necessary legislation has been enacted. This is expected to be during the second half of 2010.
Key features
The key features of the new portability arrangements are:
- Participation will be voluntary for KiwiSaver members and scheme providers.
- Retirement savings may only be transferred between a KiwiSaver scheme and an Australian complying superannuation fund regulated by the Australian Prudential Regulation Authority.
- A KiwiSaver member must permanently emigrate to Australia to be able to transfer his or her retirement savings. The requirements for proof of permanent emigration, to be supplied to the member’s provider before the savings can be transferred, will be the same as for permanent emigration to other countries. These requirements are contained in clause 14, schedule 1 of the KiwiSaver Act 2006.
- A KiwiSaver member will not be able to withdraw any retirement savings in cash after one year if the member permanently emigrates to Australia, as can be done if the person emigrates to a country other than Australia.
- Any member tax credits may be transferred to Australia. Under the current rules, a person’s member tax credits are recovered by the Crown if the person withdraws his or her savings in cash after permanent emigration.
- New section CW 29B of the Income Tax Act 2007 provides that an amount of Australian-sourced retirement savings transferred to a KiwiSaver scheme under the portability arrangements will be treated as exempt from tax at the point of entry.
- Some policy differences (for example, relating to withdrawals for retirement and purchasing a first home) will apply to Australian-sourced retirement savings that have been transferred to a KiwiSaver scheme. However, any New Zealand-sourced earnings on those retirement savings will be subject to normal KiwiSaver policies.
- New rules will govern the treatment of KiwiSaver balances after a member permanently emigrates to Australia. For permanent emigration to any other country, the current rules in clause 14(1) and (2), schedule 1 will continue to apply.
Background
The retirement savings portability arrangements were developed by a working group established to investigate options for improving the portability of retirement savings between New Zealand and Australia.
The trans-Tasman portability arrangements recognise the high degree of integration between New Zealand and Australia, and are intended to make it easier to transfer retirement savings across the Tasman to improve labour mobility between the two countries.
The portability details are contained in an Arrangement between the governments of New Zealand and Australia which was signed by the Minister of Finance and the Australian Treasurer on 16 July 2009. The Arrangement is available at http://taxpolicy.ird.govt.nz.
Detailed analysis
Tax treatment of transfers
One of the principles of the portability arrangements is that transferring retirement savings across the Tasman should not lead to an unnecessary loss in value of those savings. To protect the value of retirement savings, such transfers between New Zealand and Australia will be exempt from entry or exit taxes.
Generally, a transfer from a foreign superannuation scheme to a registered superannuation scheme in New Zealand involves:
- a distribution from the source superannuation scheme to the member; and
- the member reinvesting the proceeds in the host country’s superannuation scheme.
Consequently, a transfer of retirement savings from Australia to New Zealand may give rise to a taxable dividend. New section CW 29B of the Income Tax Act 2007 will ensure that an amount of Australian-sourced retirement savings transferred to a KiwiSaver scheme under the portability arrangements becomes exempt income at the point of entry.
For transfers from a KiwiSaver scheme to an Australian scheme, the only possible tax impost is non-resident withholding tax (NRWT), which is levied on dividends, interest and royalties paid to non-residents. Distributions from a KiwiSaver scheme to non-residents are not treated as dividends and so are not subject to NRWT. Therefore, no specific exemption for transfers of savings from a KiwiSaver scheme to an Australian scheme is necessary.
Australia’s excess non-concessional contributions tax
Australia imposes a tax-free limit (a “non-concessional contributions cap”) of A$150,000 on the amount of superannuation contributions that an individual can make from non-wage sources in a particular year. Contributions that exceed this cap are taxed at a rate of 46.5 percent. The tax is intended as a disincentive for people to accumulate excessive contributions in superannuation funds, as Australian superannuation funds are taxed on their earnings at concessional rates (15 percent) and pensions paid out of such funds are typically tax-free after 60.
Transfers from KiwiSaver to an Australian superannuation scheme will be subject to the non-concessional contributions cap on initial entry into the Australian system. This is intended to maintain the integrity of the Australian superannuation system. The cap will not apply to New Zealand-sourced or Australian-sourced superannuation contributions re-entering Australia.
An individual under 65 can bring forward the next two years’ worth of contributions, so can contribute up to A$450,000 in any particular year without breaching the contributions cap. The cap will be indexed to inflation from 2010–11.
New rules for permanent emigration to Australia
Under the current rules, clause 14, schedule 1 of the KiwiSaver Act 2006 allows members who permanently emigrate overseas to withdraw their savings in cash one year after emigration. Any member tax credits that the person has accumulated cannot be withdrawn, and will be recovered by the Crown. The amendments contained in the bill replace these rules for KiwiSaver members who permanently emigrate to Australia.
Under new clause 14B, schedule 1, a KiwiSaver member can transfer his or her retirement savings from their participating KiwiSaver scheme to an Australian complying superannuation fund regulated by the Australian Prudential Regulation Authority. Members can request the transfer of their savings at any time after they supply their provider with proof of their permanent emigration to Australia. The requirements for proof of permanent emigration to Australia will be the same as those contained in clause 14(3), schedule 1 of the KiwiSaver Act 2006.
KiwiSaver members transferring their retirement savings to Australia will be able to take their accumulated member tax credits and $1,000 Crown contribution with them. Currently, member tax credits are recovered by the Crown if a member withdraws his or her savings following permanent emigration from New Zealand.
Under Australian law, retirement savings transferred from KiwiSaver to Australia will remain locked in until the member reaches the age of entitlement to New Zealand Superannuation (currently 65).
Under Australian law, any New Zealand-sourced retirement savings that are transferred to Australia will not be able to be transferred from Australia to a third country.
The portability arrangements will be the only way for KiwiSaver members to take their accumulated savings with them when they permanently emigrate to Australia. Consequently, KiwiSaver members who emigrate to Australia will not be able to withdraw their accumulated savings in cash. This reflects the policy intent of KiwiSaver, which is to encourage a long-term savings habit and asset accumulation.
The portability arrangements will apply only to transfers of retirement savings between New Zealand KiwiSaver schemes and Australian complying superannuation funds. For KiwiSaver members who permanently emigrate to a country other than Australia, the current rules in clause 14, schedule 1 of the KiwiSaver Act will continue to apply, except that the amount withdrawn will be reduced by the amount of Australian-sourced retirement savings (as well as any member tax credits), as provided by clause 14(1) and (2), schedule 1.
Members of complying superannuation funds in New Zealand will not be eligible for the portability arrangements, but are covered by the existing rules after permanent emigration, described in clause 14, and amended by this bill.
Policy differences for Australian-sourced retirement savings
Differences between the Australian and New Zealand superannuation schemes mean that transferred savings will remain subject to a number of source-country rules. These rules will apply only to the principal amount of savings that is transferred to the host country. Once transferred, earnings on those savings and any subsequent contributions will be subject to the rules of the host country. Applying these policy differences will ensure that portability supports labour market mobility, rather than being used to take advantage of regulatory and policy differences between New Zealand and Australia.
Members can completely withdraw their retirement savings on the later of five years of membership or on reaching the age of entitlement to New Zealand Superannuation (currently 65). Despite this, new clause 4B, schedule 1 will allow Australian-sourced retirement savings which are held in KiwiSaver to be withdrawn at age 60 if the member is retired. This is consistent with the Australian rules on the withdrawal of retirement savings, and ensures that an individual is not disadvantaged by moving from Australia to New Zealand. These individuals could otherwise have accessed the savings tax-free at 60 if they had remained in Australia.
The government provides members of a KiwiSaver scheme with a member tax credit that matches their personal contributions at a rate of 100 percent, up to a maximum of $1,042.86 a year. To be eligible, members must reside mainly in New Zealand in the year for which the tax credit applies. As Australian savings relate to contributions made while the member was not residing in New Zealand, the member tax credit will not be paid on such savings after they are transferred to KiwiSaver. The definition of “member credit contribution” in section YA 1 of the Income Tax Act 2007 is being amended to achieve this.
Australian-sourced savings held in KiwiSaver will not be able to be used for any of the KiwiSaver housing-related initiatives. The Arrangement between the two countries prescribes that transferred savings cannot be withdrawn to assist with the purchase of a first home, under clause 8, schedule 1 of the KiwiSaver Act 2006. This is because Australia’s home ownership scheme is separate from its retirement savings scheme. However, any earnings on Australian-sourced savings may be withdrawn for the purchase a first home.
The mortgage diversion facility is a feature of KiwiSaver which allows a member to divert up to half of their contributions to their mortgage repayments. It was closed to new applicants from 1 June 2009. To fulfil the intent behind the portability arrangements, and to ensure consistency between the first home withdrawal initiative and the mortgage diversion facility, Australian-sourced retirement savings will not be able to be diverted to a member’s mortgage repayments under new section 229(2)(jb) of the KiwiSaver Act.
The KiwiSaver deposit subsidy provides a member with a lump sum payment of $1,000 for each year of contribution, up to a maximum of $5,000, to use for a deposit on the member’s first home. To be eligible for the subsidy, a member must contribute at least two percent of his or her salary or wages for at least three years. To align the deposit subsidy rules with the residence requirements for other benefits of KiwiSaver, contributions made to an Australian complying superannuation fund and subsequently transferred to New Zealand will not count towards eligibility for the subsidy. This will be contained in the deposit subsidy administrative rules which are administered by the Housing New Zealand Corporation.
If a person’s membership in KiwiSaver is invalidated after retirement savings are transferred from Australia to New Zealand, the net value of any such savings will be returned to the member’s Australian superannuation account instead of being refunded in cash to the member.
As previously noted, KiwiSaver members who permanently emigrate from New Zealand to a country other than Australia will not be able to withdraw any Australian-sourced retirement savings in cash after one year.