Overview

Clauses 2(14), 6, 7, 8, 9, 17, 18, 25, 30, 40, 41, 42, 43, 66, 67, 75, 103(9), (10), and (11), 106, 115, 116 and 117

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.

An issues paper proposing reforms to simplify the tax treatment of foreign superannuation was released in July 2012. Fifty-nine submissions from a variety of interested parties – including individuals, professional advisory firms and pension transfer agents – were received. The proposals included in this bill took into account suggestions put forward in submissions and consultation.

The bill proposes a new cohesive set of rules to replace the current rules applying to interests in, and income from, foreign superannuation schemes from 1 April 2014. It is proposed that the FIF rules will generally cease to apply to foreign superannuation interests, unless they are “grandparented”.

Instead lump-sum amounts received from 1 April 2014 would 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 new rules will also allow people who have transferred their funds to a KiwiSaver scheme to withdraw an amount to pay their tax liability arising from the transfer.

The bill also contains a concessionary “15% option” to assist taxpayers who have not previously complied with their tax obligations.

Fifteen submissions were received in relation to the foreign superannuation proposals included in the bill. Most of these proposals broadly supported the changes proposed by the bill. A number of submissions addressed the transitional measures and the concessionary “15% option” for taxpayers who have not previously complied.

This officials’ report proposes several policy and technical changes to the foreign superannuation proposals in the bill.

Two changes relate to the proposed optional KiwiSaver withdrawal mechanism. Officials propose that KiwiSaver providers should inform Inland Revenue when a taxpayer has used the proposed optional withdrawal facility, and where the provider’s systems allow it, pay the amount directly to Inland Revenue. Officials also propose that the facility should be able to be used if the person’s student loan repayment obligation increases as a result of the transfer.

A third change relates to how transfers of a foreign superannuation interest from one person to another are taxed when the transfer occurs on death or relationship split. Officials propose making the bill more consistent with other parts of the Income Tax Act 2007 that deal with the transfer of assets in such situations.

A further proposal is to restrict the application of the proposed regime to foreign superannuation interests where the rights to the interest were first acquired while the taxpayer was non-resident. Officials note that this is consistent with the existing law for such taxpayers.

Several submitters noted that the proposed changes as introduced could potentially result in effective double taxation for taxpayers who are required to pay tax under the new rules and have not complied with their obligations under the FIF rules in the past. To ensure that the rules work as intended, officials propose that these taxpayers should not also be liable for their unpaid FIF tax obligations.

A number of minor changes and drafting clarifications are also proposed.