Past withdrawals - 15% option
Clauses 25, 116 and 117
Issue: Support for 15% option
Submission
(Ernst and Young, New Zealand Institute of Chartered Accountants)
Two submitters are supportive of the proposed concessionary option available to taxpayers who have previously not complied with their tax obligations (Ernst & Young, New Zealand Institute of Chartered Accountants).
Comment
Officials note the support for the proposed concessionary option.
Recommendation
That the submission be noted.
Issue: Retrospectivity
Submission
(Elaine Hope, Leonie Walker)
One submitter stated that people who complied with the law previously should not have to pay 15% tax on a retrospective basis.
Another submitter stated that the changes should not be brought in retrospectively; the new rules should apply on a prospective basis.
Comment
The 15% option does not retrospectively impose a tax liability on any individuals.
Taxpayers who made a lump-sum withdrawal or transferred their foreign superannuation scheme before 1 April 2014 and complied with the law that existed at the time in relation to their scheme are not required to take further action. This includes people who have not paid any tax because an exemption applied to their situation under existing law (for example, because they were a transitional resident at the time). In these situations, the taxpayer will have no tax obligations as there was no liability under the existing law.
However, officials understand that a number of people who made a withdrawal or transfer may not have complied with their tax obligations.
These taxpayers can apply the law as it applied to their interest at the time that they made the withdrawal. They may be subject to use-of-money interest or penalties, although these may be reduced where the taxpayer voluntarily discloses their tax liability.
Alternatively, they can choose to use the 15% option proposed in the bill. The 15% option is a concessionary, low-cost alternative option for taxpayers who have made a lump-sum withdrawal or transfer before 1 April 2014, and who did not fulfil their tax obligations in relation to the foreign superannuation interest.
Under this option, the person can include 15% of their lump sum as income in their 2013–2014 or 2014–2015 tax return, and apply their marginal tax rate to that amount. For example, a person who transferred $100,000 would include $15,000 in their tax return. If their tax rate is 33%, they will have tax to pay of $5000.
It is important to note that taxpayers are not required to use the 15% option proposed in the bill and may instead choose to apply the law as it existed at the time.
Recommendation
That the submission be declined.
Issue: Past non-compliance should not be pursued
Submission
(Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited)
Non-compliance should not be pursued and therefore the 15% option should not be available.
Comment
As noted above, a number of people have not complied with their tax obligations in relation to their foreign superannuation. The 15% option is intended as a low-cost concessionary measure for taxpayers to get their tax affairs in order.
However, it should be noted that although non-compliance has been high, a number of people have complied with their tax obligations.
The approach suggested by the submitter is likely to undermine voluntary compliance, which is a cornerstone principle of New Zealand’s tax administration.
Recommendation
That the submission be declined.
Issue: Interest and penalties
Submission
(Ernst & Young, Financial Services Council)
The revised due date that applies in relation to the 15% option should also apply to non-compliant taxpayers who choose to apply the law that existed at the time.
Comment
Taxpayers have an obligation to comply with the tax rules governing their foreign superannuation interest at the time they are required to.
Officials are of the view that non-compliance should not be rewarded, but acknowledge that the existing rules are complex.
The 15% option is intended to be a low-cost option available to non-compliant taxpayers to help them get their tax affairs in order.
As it is an option, if a taxpayer chooses not to use, their liability under the existing law should remain.
Officials note that penalties are generally reduced for voluntary disclosures.
Recommendation
That the submission be declined.
Issue: Timeframe
Submission
(Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited, New Zealand Institute of Chartered Accountants)
The window for the 15% option should be aligned with the period for which a taxpayer is required to keep tax records (i.e. seven income years) and non-compliance before that should not be audited (New Zealand Institute of Chartered Accountants).
The window for the 15% option should begin on 18 December 2006 or 1 April 2010. Non-compliance before this should not be audited. 18 December 2006 is proposed as this was the date of royal assent of the bill that excluded certain Australian superannuation schemes from the FIF regime. The rationale behind 1 April 2010 is that it is the beginning of the income year in which a number of articles highlighting the potential tax implications arising from lump-sum payments and transfers were published. (Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited).
Comment
The 15% option is a concessionary measure and officials therefore disagree with limiting its scope.
Officials note that the extent of audit activity relating to previous non-compliance will be determined according to how Inland Revenue’s resources may be best utilised, as is normal tax administrative practice.
Recommendation
That the submission be declined.
Issue: Interests in foreign investment funds – clarification
Submission
(KPMG, New Zealand Institute of Chartered Accountants)
Taxpayers who did not comply with the FIF rules should be able to use the 15% option if they have made a lump-sum withdrawal before 1 April 2014 (KPMG).
It should be clarified that taxpayers who have not complied with their obligations are able to choose between applying the law as it was at the time of withdrawal in each of the relevant income years, or paying tax on 15% of the withdrawal. If there were any applicable exemptions available to them at the time taxpayers should be able to utilise these (New Zealand Institute of Chartered Accountants).
Comment
The policy intention is that taxpayers who have made a withdrawal and who have not complied with their obligations are able to choose between applying the law as it was at the time of withdrawal, or paying tax on 15% of the withdrawal. If there were any applicable exemptions available to them under the law that applied at the time, taxpayers should be able to utilise these.
Officials consider that this is, in general, sufficiently clear in the legislation.
However, one submitter noted that the current drafting does not seem to allow taxpayers who were non-compliant with the FIF rules and who made a withdrawal to use the 15% option in relation to past lump-sum withdrawals. Instead these people would only be able to use the law that existed at the time (i.e. recalculate their FIF liabilities).
Officials agree that the proposed legislation should be clarified so that non-compliant FIF taxpayers who made a lump-sum withdrawal before 1 April 2014 should have the 15% option available to them.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Withdrawals derived after 1 April 2014 should also be eligible for the 15% option
Submission
(Offen Advisors Limited, Owens Tax Advisors Limited)
The 15% option should be extended so that taxpayers who transfer their foreign superannuation scheme up to six months after 1 April 2014 are eligible to use the 15% option.
Comment
The policy intention is that taxpayers who derive a lump sum on or after 1 April 2014 would be subject to the proposed new regime.
Officials consider that it would be inappropriate to have the concessionary 15% option available for a longer period as it would undermine the proposed new regime.
Furthermore, officials consider that as part of the submission it would be necessary to amend the application date of the proposed regime, because it would be inappropriate to have the proposed new regime and the concessionary 15% option both applying at the same time.
Recommendation
That the submission be declined.