Overview

People who migrate to New Zealand (or those who return to New Zealand after working overseas) frequently have contributed to superannuation schemes in their previous country of residence.

The current rules for taxing New Zealand residents on their foreign superannuation are complex and can be difficult for taxpayers to understand. In some cases, superannuation interests are subject to tax on accrual under the foreign investment fund (FIF) rules. In other cases, a person may be taxed on receipt depending on the legal structure of the foreign scheme (such as whether the scheme is structured as a company or a trust). The tax treatment differs according to which set of rules applies. As a result, it is not always clear that the rules result in a fair outcome, particularly for lump-sum amounts.

From 1 April 2014, a new cohesive set of rules will replace the current rules applying to interests in, and income from, foreign superannuation schemes.

The FIF rules will cease to apply to foreign superannuation interests.

Instead lump-sum amounts will be taxed on receipt under one of two new calculation methods: the schedule method or the formula method. The schedule method is the default method. It is designed to approximate the tax that would have been paid on accrual while the person was New Zealand-resident, in conjunction with an interest charge that recognises that the payment of tax has been deferred until receipt. The formula method taxes the person based on the actual gains while they were resident in New Zealand, again in conjunction with an interest charge that recognises that the payment of tax has been deferred until receipt.

The proposed new rules were signalled in the officials’ issues paper, Taxation of foreign superannuation, released in July 2012. While essentially following the approach proposed in the issues paper, the rules proposed in the bill vary in some respects from those proposed in the issues paper. These variances are in response to submissions received and subsequent consultation with interested parties.