Miscellaneous
Issue: When is a transfer “received”?
Clause 8
Submission
(Charter Square Services)
There can be a long time delay between when a foreign superannuation scheme releases the funds of an individual and when the receiving New Zealand fund cashes in the cheque. The time at which the transfer is received should be clarified as it could impact the individual’s tax liability.
Comment
Officials understand that when an individual transfers their foreign superannuation interest into a New Zealand or Australian scheme, it is “received” when the New Zealand or Australian scheme receives it.
Officials consider that this could be clarified in guidance.
We understand that the submitter is concerned that when a taxpayer makes an application to transfer their foreign superannuation scheme towards the end of an income year, the New Zealand scheme may not receive it until part–way through the next income year. This would have the result of pushing the taxpayer into a higher schedule year fraction.
Officials note that this timing of income is a standard feature of the Income Tax Act 2007 and that taxpayers have sufficient opportunity to plan when to transfer their scheme.
Recommendation
That the submission be noted.
Issue: Tax bracket creep
Clause 8
Submission
(KPMG)
The tax rate which applies to a lump-sum withdrawal should be calculated with reference to the taxpayer’s average New Zealand income in the year of withdrawal and the previous four years, or else added to a taxpayer’s income, and spread over the year of withdrawal and the following four years.
Comment
This would add unnecessary complexity, as the taxpayer would be required to obtain further information about previous income years or would be required to file IR 3 income tax returns for more years than required under the rules as currently proposed.
The issue raised by the submitter also exists in relation to other lump-sum payments, such as lump sum compensatory payments. No similar relief is provided other lump sums. As such, any decision here would set a precedent for other lump sum payments.
Recommendation
That the submission be declined.
Issue: De minimis threshold
Clause 8
Submission
(Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited)
There should be an aggregate $50,000 de minimis exemption for transfers to QROPS or KiwiSaver. The submitters argue that this would encourage compliance as taxpayers would be able to transfer relatively small foreign superannuation scheme interests to New Zealand without penalty.
Comment
Officials note that the proposed rules do not penalise taxpayers who transfer their foreign superannuation interests to New Zealand. The tax imposed on the transfer would be the same as if the taxpayer had accounted for tax on accrual.
A de minimis exception from certain tax requirements is sometimes appropriate where the compliance costs outweigh the tax involved. Officials consider that the proposed rules are as simple as possible while still maintaining fairness, and therefore do not believe that a case can be made for a de minimis threshold.
Officials also note that no precedent for an exemption from tax for de minimis amounts exists under the current rules. There is a de minimis exception available under the FIF regime, but this does not meant the taxpayer is exempt from tax altogether. The taxpayer would instead be required to account for tax paid when the income is received, either as a lump sum or a pension.
Recommendation
That the submission be declined.
Issue: Past non-compliance should be given a full amnesty, but the schedule method should be more punitive
Clauses 25, 106, 116 and 117
Submission
(Charter Square Services)
The 15% option for past non-compliance should be reduced to 0%, but going forward the schedule method should be more punitive so that taxpayers are encouraged to transfer during the exemption period.
[Raised in the oral submission]
Comment
This submission consists of two points that are to be considered together.
The submitter argues that providing a full amnesty would reduce the number of resources Inland Revenue would otherwise divert into audit activity.
Furthermore, it would encourage migrants who have not transferred their retirement savings to New Zealand to do so before 31 March 2014, thereby bringing a large amount of money into the New Zealand tax base.
Officials do not agree that the submitter’s arguments outweigh the consequences that would occur from rewarding non-compliance. As noted in the issue “past non-compliance should not be pursued” a 0% rate for past non-compliance would adversely affect voluntary compliance, which is a cornerstone principle of New Zealand’s tax administration system.
The submitter provides that in conjunction with this full amnesty, the schedule method needs to be more punitive once a taxpayer’s exemption period has expired. To achieve this, the submitter proposes that once the exemption period has ended, the assessable period would be calculated from their first day as a New Zealand resident. The effect of this is that in the fifth year of residence, the schedule year fraction would be 23.07% rather than the 4.76% as currently proposed.
The rationale is that by making the rate more punitive, it would encourage more migrants to transfer their retirement savings to New Zealand during the exemption period. This would have the effect of bringing the funds into the New Zealand tax base sooner.
Officials disagree with this analysis as the tax implications of the transfer of a foreign superannuation interest are often an afterthought. We do not believe that making the schedule method more punitive would have a significant effect on the number of transfers made during the exemption period.
Officials are also opposed to this submission because it creates a cliff face in the schedule method. The schedule method is designed as a sliding scale. Under the submitter’s approach, a difference of one day could see a taxpayer being assessed on 23.07% of a lump sum rather than 0%.
Recommendation
That the submission be declined.
Issue: Review section 70 of the Social Security Act 1964
No clause
Submission
(Grey Power New Zealand Federation Incorporated)
Section 70 of the Social Security Act 1964 should be objectively reviewed, with the objective being to devise a commensurate arrangement for existing immigrant retirees.
Comment
The submitter argues that the proposed changes heavily incentivise individuals to withdraw their foreign superannuation and transfer the proceeds to New Zealand. They argue that the proposed changes bestow a favourable option on new immigrants that was not available to existing retirees, because the only practical option available to existing immigrant retirees was to leave their contributions in foreign superannuation schemes until they matured in the form of an annuity or indexed periodic remittance.
Officials note that the proposals in the bill are aimed at ensuring that there is no disincentive for taxpayers to transfer their foreign superannuation to a New Zealand superannuation scheme compared to leaving their superannuation overseas (rather than providing an incentive). In broad terms, we do not consider that the proposals create a relative disadvantage for taxpayers who can only take their foreign superannuation in the form of an annuity or periodic remittance.
The submitter states that this perceived inequity may be resolved by arranging an objective review of section 70 of the Social Security Act 1964. Section 70 of the Social Security Act 1964 provides for the deduction of an individual’s foreign social security pension from their New Zealand Superannuation entitlement. This deduction occurs when the foreign social security pension forms part of a programme of benefits and pensions that are paid for similar circumstances as New Zealand benefits and pensions; and the overseas pension scheme is administered by the government of the country that pays the pension.
Officials note that this issue is not related to the contents of the bill.
In discussions between officials from Inland Revenue, Treasury, and Ministry of Social Development, it was noted that no review of section 70 of the Social Security Act 1964 is planned.
Recommendation
That the submission be declined.
Issue: Social security agreement between New Zealand and the United Kingdom
Submission
(Matter raised by Committee)
The Committee requested further information regarding whether there should be a social security agreement between the UK and New Zealand to account for social security pensions paid by the UK, which currently are not indexed for inflation.
Comment
Officials understand that a social security agreement currently exists between New Zealand and the UK.
Social security agreements are negotiated and administered by the Ministry of Social Development, and are not affected by the proposals in the Bill.
Officials have consulted with the Ministry of Social Development, who have provided the information set out below.
The Social Security Agreement between New Zealand and the UK
The text of the Social Security Agreement between New Zealand and the UK was last revised in 1983 and was specified in the Social Security (Reciprocity with the United Kingdom) Act 1983. This Act was revoked on 1 April 1990 and replaced by the ‘Social Welfare (Reciprocity with the United Kingdom) Order 1990’ (the Agreement) from that same date but the text remained unchanged.
The Agreement determines access to and treatment of social security payments between the countries and ensures that the two countries share the benefit and pension costs of mutual clients. In general, the Agreement provides the following benefits:
- people from the UK who move to New Zealand can use the Agreement to help them meet the residence criteria for New Zealand benefits that are covered by the Agreement
- New Zealanders who live in the UK can use their New Zealand residence to help them meet the residential/contribution criteria for UK benefits and pensions.
In 1983 when the Agreement was last revised, New Zealand had no ability to make payments to superannuitants who were residing in any overseas country. Consequently, the UK Agreement reflects that position. Under the Agreement, New Zealand benefits are not payable to residents of the United Kingdom, However, as the Agreement allows periods of residence in New Zealand to be treated as periods of contributions in the UK, former New Zealand residents, provided that they have not lived in a country other than New Zealand or the UK, are able to access the basic United Kingdom State Pension at the full standard rate.
New Zealand’s ability to pay pensions overseas was introduced from 1 April 1990 and the social security agreements that New Zealand has entered into since that time, such as the Netherlands Agreement, allow for payment of New Zealand Superannuation to overseas residents.
Non-indexation of UK pensions paid to New Zealand residents and a revision of the Agreement
UK pensioners living overseas in certain countries, including New Zealand, Australia, Canada and South Africa, have their UK State Pension rates “frozen”. In other words, their State Pension is paid at the same rate as it was when they first became entitled, or the date they left the UK if they were already pensioners then. The frozen rates do not apply to people living in countries where a reciprocal social security agreement with the UK allows for increases to be paid or where a person lives in a European Economic Area (EEA) country. The New Zealand/UK Agreement does not provide for UK pension increases.
Officials note that this issue is not related to the contents of the bill.
However, officials from the Ministry of Social Development have advised that they have discussed the frozen pension policy with UK officials. UK officials have advised that there are no plans to amend this policy for UK pensioners residing in New Zealand. New Zealand officials from the Ministry of Social Development will continue to discuss the subject with UK officials when the opportunity arises.
Recommendation
That the submission be noted.