Chapter 4 - Implementation and transitional issues
4.1 The proposals in this issues paper are expected to be contained in a tax bill scheduled for introduction later this year or towards the middle of next year.
Start date for new rules
4.2 As noted above, the complexity of the current rules has contributed to many people not complying with the existing law. Moving from the existing rules to the new rules creates transitional issues, both for people who complied with the existing law – either the FIF rules or the tax rules for lump sums – and for those who have not.
4.3 It is proposed that the new rules apply from the 2011–12 income year. In general, people who receive income from their foreign superannuation scheme (a withdrawal, transfer or pension) on or after 1 April 2011 would be taxed under the new rules.
4.4 However, many people have complied with the FIF rules in the past by filing returns disclosing FIF income. It is not appropriate to require these people to pay additional tax on receipt of the income. Consequently, this paper proposes that those who returned FIF income for the 2010–11 income year by 31 March 2012 can continue to use the FIF rules for future periods (that is, they would be grandparented). The 2010–11 income year is appropriate as it is the most recent year for which all FIF returns must have already been filed. These people would not be taxed under the proposed new rules when they receive a pension or lump sum.
4.5 People who transfer or receive income from their foreign superannuation scheme in the 2011–12 or subsequent income years and who do not meet the conditions in paragraph 4.4 would apply the proposed new rules. They would be taxed on receipt of their lump sum or pension rather than on accrual.
Example 3
Jacqui migrated from Canada to New Zealand in 2001 and left her superannuation in the foreign scheme. She is exempt from the FIF rules for the first four years under the new migrants’ exemption, but returns FIF income on her foreign superannuation for subsequent income years. In 2015, she decides to withdraw the whole amount as a lump sum. As she returned FIF income in the 2010–11 income year by 31 March 2012, she can continue to use the FIF rules after 1 April 2011. She is not subject to tax on the lump sum withdrawal in 2015 under the new rules.
Application to past lump sum withdrawals or transfers
4.6 In recent years, a number of new tax residents have withdrawn their savings from a foreign superannuation scheme. In many cases, the distribution from the foreign scheme was transferred directly to a locked-in New Zealand superannuation scheme. These distributions are generally subject to tax, and in some instances the New Zealand-resident may have been liable for tax on all or part of the distribution.
4.7 In other cases, however, an individual might have had little or no tax to pay under the existing rules, depending on the underlying legal nature of the foreign superannuation scheme (such as whether it is a unit trust), whether the FIF rules applied, and whether the individual was a transitional resident.
4.8 Some of these people were not aware that they were potentially subject to tax when the foreign scheme distributed their superannuation savings.
4.9 It is important that people comply with their tax obligations under the law that applied at the time. This is to ensure that everyone, including those who paid the appropriate amount of tax, are treated fairly.
4.10 On the other hand, officials recognise that some of the people who withdrew or transferred their savings would not have done so had they been aware of the tax implications. This has largely arisen as a result of the complexity of the rules.
4.11 To ensure that these people are not unfairly disadvantaged, this paper suggests that it would be appropriate to allow people, in limited situations, to apply either:
- the law that applied at the time that they withdrew or transferred the savings; or
- an inclusion rate of 15%, regardless of the length of time that the individual was resident before the withdrawal or transfer.
4.12 Under the second option, only 15% of the lump sum would be assessable income. The remainder would not be assessable. This would result in an effective tax rate of up to 5% on the lump sum, depending on the individual’s marginal tax rate.
4.13 The choice would be available to people who withdrew foreign superannuation as a lump sum between 1 January 2000 and 31 March 2011, and who disclose the existence of the transfer to Inland Revenue before
1 April 2014. The requirements for disclosure will be provided once the policy has been finalised. As noted previously, transfers on or after 1 April 2011 would be subject to the new rules, with the relevant inclusion rates in the table in paragraph 3.25.
4.14 No use-of-money interest or shortfall penalties would apply when an individual chooses to pay tax using the 15% inclusion rate.
4.15 If an individual chooses to calculate their tax liability under the law that applied at the time they withdrew the savings, and they have a tax liability, penalties and use-of-money interest would apply. However, Inland Revenue will have discretion to write off shortfall penalties for people in these circumstances, as long as an individual has not taken an abusive tax position and has not engaged in evasion or a similar act as part of taking a tax position. These people would not qualify for the grandparenting of the FIF rules as in paragraph 4.4 above.
4.16 The proposal aims to ensure that all people are treated fairly, including those who have paid the appropriate amount of tax, and as well as ensuring that new migrants who may not have been aware of the rules at the time they withdrew their superannuation are not unfairly disadvantaged.
Example 4
Robert migrated to New Zealand in 2005 and transferred superannuation worth $90,000 to a New Zealand superannuation scheme in 2007. As he was exempt from the FIF rules under the new migrants’ exemption, he should have paid tax on the transfer but was unaware that tax was due.
In 2013, Robert realises that he should have paid tax when he transferred his superannuation. Once the new legislation has been enacted, he tells Inland Revenue of the transfer and chooses to apply the single low inclusion rate to the lump sum amount. He must pay tax on 15% of the $90,000 transfer, which at a marginal rate of 33% results in a tax liability of $4,455. This gives an effective tax rate of just under 5%. Robert would subsequently have no further tax to pay on that transferred amount, although any investment gains in the New Zealand scheme would remain taxable.
Past transfers to locked-in New Zealand superannuation schemes
4.17 As noted in paragraph 3.43, some people may have transferred their foreign superannuation to a New Zealand scheme which has “lock-in” rules”.
4.18 If there is a resulting tax liability, the individual may have difficulty paying the tax if they are unable to access their funds due to the lock-in restrictions.
4.19 Officials invite comment on whether there should be a mechanism to allow tax to be paid from the transferred amount held in the New Zealand superannuation scheme and, if so, how this should operate.