Recognised contributions

Clause 8

Issue: Voluntary contributions should be deductible

Submission

(Ernst & Young, New Zealand Institute of Chartered Accountants)

Voluntary contributions should be considered recognised contributions and therefore deductible (Ernst & Young, New Zealand Institute of Chartered Accountants).

Comment

Under the new rules, tax is imposed when a lump sum is received or transferred under either the schedule or formula method.

The schedule method works backwards to presume, on the basis of the assumed interest rate, a particular value of the superannuation interest at the beginning of the person’s assessable period. Any difference between the transferred amount and this ‘deemed’ original value is treated as gains. The deemed gains are taxable, while the deemed original value is not. The underlying result is that the schedule method treats contributions made while an individual is New Zealand-resident partly as investment gains and effectively taxes them as such.

There are different ways of relieving this potential over-taxation. The approach taken in the bill is to apply the schedule method to the amount of the lump sum after deducting the value of certain contributions made while New Zealand-resident, as long as those contributions have been subject to New Zealand tax. This reduces the amount of the lump sum on which the schedule year fraction is applied by the value of the contributions, thereby reducing the individual’s taxable income.

While this has the advantage of being a very simple approach, it does have the result of being overly concessionary in most circumstances. This is because the deductions reduce the value of the lump sum on which the schedule year fraction is applied, but the schedule year fractions already implicitly divides the lump sum into capital amounts and gains. This effectively means that the individual would receive a double deduction for the contribution.

Because of this potential for under-taxation, contributions are subject to certain restrictions before they are “recognised” (that is, deductible under either the schedule or the formula method). In particular, voluntary contributions made to a foreign superannuation scheme after the individual becomes New Zealand resident would not be deductible. Only compulsory contributions required under the scheme’s rules would be deductible.

Apart from the issue of under-taxation in respect of the schedule method, officials are also concerned about the potential for undermining the FIF rules – that is, a person who wishes to be subject to receipts-based taxation rather than the FIF rules could use the rules to route money through “voluntary contributions” into their foreign superannuation scheme and avoid being taxed annually.

This is also why officials also propose in this report to restrict the receipts-based approach to taxpayers who first acquired their foreign superannuation interest while non-resident.

Recommendation

That the submission be declined.

Issue: Voluntary contributions should be deducted under the formula method

Submission

(Financial Services Council)

Voluntary contributions should be considered recognised contributions under the formula method only (Financial Services Council).

Comment

One submitter acknowledged that allowing a deduction for voluntary contributions may be problematic for the schedule method, but submitted that voluntary contributions should be allowed only under the formula method, as the concern does not apply to the formula method.

Officials agree that allowing a deduction for voluntary contributions under the formula method does not present the same concerns of under-taxation as for the schedule method. This is because the formula method relies on actual information to divide a lump sum into a capital amount and gains.

However, as noted above, officials consider that there is a concern that a person who wishes to be subject to receipts-based taxation rather than the FIF rules could use the rules to route money through “voluntary contributions” into their foreign superannuation scheme and avoid being taxed annually.

This is also why officials also propose in this report to restrict the receipts-based approach to taxpayers who first acquired their foreign superannuation interest while non-resident.

Recommendation

That the submission be declined.