Chapter 1 - Introduction
1.1 This paper proposes changing the rules for taxing foreign retirement savings held by New Zealand residents.
1.2 People who migrate to New Zealand or return to New Zealand after working overseas will often have retirement savings in their previous country of residence.
1.3 The Government is concerned that the current rules for taxing foreign retirement savings can result in inconsistent outcomes, and can be highly complex for people to apply.
1.4 This paper proposes replacing the existing rules for taxing foreign superannuation with a single set of rules which would be fair and simple from a compliance perspective.
1.5 In brief, interests in foreign superannuation schemes would no longer be taxable on an accrual basis under the foreign investment fund (FIF) rules. Instead, the proposed new rules would provide that all pension payments would remain taxable in full on receipt. Lump sum withdrawals or transfers would be partially taxed on receipt. The tax would approximate the amount of tax on investment gains that would ordinarily have accrued during the period that an individual is resident in New Zealand, had the individual transferred the original amount to New Zealand.
1.6 The temporary exemption for transitional residents will continue to apply to receipts from foreign superannuation schemes. Other rules that exempt Australian superannuation in certain circumstances (such as the New Zealand-Australia double tax agreement, and the arrangement on trans-Tasman portability of retirement savings) will also remain unchanged.
1.7 The changes would be included in a tax bill scheduled for introduction later this year or towards the middle of next year.
Summary of suggested changes
- Tax on all “foreign superannuation interests” would be governed by the new rules. They would be specifically excluded from the FIF rules.
- "Foreign superannuation interests” would be based on the current definition of “foreign superannuation scheme” in the Income Tax Act 2007.
- All foreign superannuation would be taxable on receipt, as follows:
1. Pensions would be taxed at an individual’s marginal tax rate when the payments are received.
2. Lump sums would be partially taxed using an “inclusion rate”. The excluded amount would not be taxable. The amount that is taxable would depend on the length of time between when an individual arrives in New Zealand and when they withdraw or transfer the superannuation. At the time of the withdrawal or transfer from a foreign superannuation scheme, they would apply the relevant inclusion rate based on the date they became a New Zealand-resident as follows:
| Years since migration | Inclusion rate |
|---|---|
| 0-2 | 0% |
| 3-4 | 15% |
| 5-8 | 30% |
| 9-12 | 45% |
| 13-16 | 60% |
| 17-20 | 75% |
| 21-24 | 90% |
| 25+ | 100% |
An individual’s marginal tax rate would be applied to the amount that results after applying the inclusion rate. For example, an individual with a marginal tax rate of 33% who makes a withdrawal of $50,000 when they have been a New Zealand-resident for eight years would have a tax liability of $4,950 (being $50,000 x 30% inclusion rate x 33% tax rate). In this case, this represents an effective tax rate of approximately 10%.
- The temporary exemption for the foreign income of transitional residents will continue to apply, as will certain rules that exempt Australian superannuation.
- The proposed new rules would apply from the 2011–12 income year. However, people who returned FIF income from their foreign superannuation for the 2010–11 income year by 31 March 2012 would continue to have that interest taxed under FIF rules. They would not be taxed on any subsequent distributions under the new rules.
- A retrospective measure would allow people who withdrew foreign superannuation as a lump sum between 1 January 2000 and 31 March 2011 and who did not comply with their tax obligations at the time to elect to use an inclusion rate of 15% for their withdrawal or transfer. To qualify, an individual must disclose the existence of the transfer to Inland Revenue before 1 April 2014. Alternatively, they can choose to return income under the rules which existed at the time.
- Some people who have transferred their foreign superannuation to a New Zealand superannuation scheme may have a tax liability on that amount. If the New Zealand scheme is “locked-in” and so does not allow access to the funds until retirement age, the individual may have difficulty paying their tax. Officials invite comment on whether there should be a mechanism that allows tax to be paid from the transferred amount held in the New Zealand superannuation scheme and, if so, how this should operate.
How to make a submission
1.8 Officials invite submissions on the matters raised in this issues paper concerning the taxation of foreign superannuation. Submissions on this paper should be made by 3 September and be addressed to:
Taxation of foreign superannuation
C/- Deputy Commissioner
Policy Advice Division
Inland Revenue Department
P O Box 2198
Wellington 6140
1.9 Or email: [email protected] with “Taxation of foreign superannuation” in the subject line.
1.10 Submissions should include a brief summary of major points and recommendations. They should also indicate whether it would be acceptable for officials from Inland Revenue and the Treasury to contact those making submissions and to discuss their submission, if required.
1.11 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.