Relationship with other tax rules
Issue: Pensions from trusts and companies
Clauses 6 and 66
Submission
(Matter raised by officials)
It should be clarified that a pension derived from a foreign superannuation scheme that is a company should not be a dividend. Similarly, it should be clarified that pensions derived from a foreign superannuation scheme that is a trust should not be taxed under the trust rules.
Comment
In many cases, the foreign superannuation scheme will legally be a unit trust, and therefore subject to the company tax rules. In other cases, the foreign superannuation scheme will legally be a trust, and therefore subject to the trust tax rules.
The proposed legislation provides that, when the foreign superannuation scheme is a company, a lump sum withdrawal is not a dividend.
Similarly, the bill proposes that a lump sum withdrawal from a foreign trust that is a foreign superannuation scheme will not be a taxable distribution.
In both cases, it is instead intended that the lump sum will be subject to the new rules.
In current legislation, pensions are taxed under a separate charging provision. However, it appears that it may not be clear whether this provision takes precedence over the company and trust rules.
It should be clarified that a pension received from a foreign superannuation scheme that is a company should be taxed as a pension and not be treated as a dividend. Similarly, it should be clarified that a pension received from a foreign superannuation scheme that is a trust should be taxed as a pension and not be taxed under the trust rules.
Recommendation
That the submission be accepted.
Issue: Application of trust rules
Clauses 66 and 67
Submission
(Ernst & Young)
There should be a statutory provision that the trust rules do not apply to foreign superannuation schemes or to income or benefits from them.
Alternatively, distributions from superannuation schemes should be excluded from the definition of “taxable distribution” in relation to non-complying trusts. Distributions from foreign superannuation schemes should be excluded from the definition of beneficiary income.
Comment
The bill proposes that a lump-sum withdrawal from a foreign trust that is a foreign superannuation scheme will not be a taxable distribution. Instead, it is intended that the lump sum will be subject to the new rules.
A trust will only be a non-complying trust if it has a New Zealand-resident settlor and does not meet certain obligations.
The bill provides that a contribution made to a foreign superannuation scheme will not automatically mean that the person is a settlor. This means that contributions to a superannuation scheme from a person made while they are New Zealand resident will not result in the foreign trust becoming a non-complying trust.
We consider that this should largely meet the submitter’s concern that such situations should not be taxed under the trust rules.
Recommendation
That the submission be noted.
Issue: Trust rules – contributor is not a settlor
Clauses 2 and 67
Submission
(Ernst & Young)
The amendment that a person who makes a contribution to a trust that is a foreign superannuation scheme is not a settlor of the trust should be retrospective, rather than applying from 1 April 2014.
Comment
As noted above, a provision in the rules provides that a contribution to a foreign superannuation withdrawal will not automatically mean that the person is a settlor.
Officials understand that this issue will rarely arise in practice, because most schemes to which a person contributes will be unit trusts, and, under current rules, will therefore be subject to the company rules rather than the trust rules.
Officials consider that a retrospective change of this nature may cause further uncertainty, and therefore do not favour this approach.
Recommendation
That the submission be declined.
Issue: Transfers following death and divorce
Clause 8
Submission
(Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited, Ernst & Young, KPMG)
Submitters have requested clarification of the treatment of transfers that occur following a relationship split, or upon death of the transferor. In particular, clarification is sought on how the new rules interact with the existing death and divorce rollover provisions.
Comment
As currently drafted, the bill proposes that the transfer of a foreign superannuation interest to another person is a taxable event. This is the same position as existing law. The original policy intention when the bill was introduced was that this would also include situations where a transfer occurs as part of a relationship property agreement, for example upon divorce. The tax liability would be based on the transferor’s years of residence.
Similarly, the bill also proposes that upon death, the transfer of a foreign superannuation interest from the deceased to another person would generally constitute a taxable event. Again, this is the same position as existing law. This is roughly consistent with other parts of the Act which provide that there would be a market value disposal and acquisition upon death.
The bill proposes an exception to this where, upon death, the foreign superannuation interest is transferred from one New Zealand resident to another New Zealand resident. In this case, rollover relief would be provided so that the interest is not taxable at the time of the transfer, but rather when the transferee ultimately makes a withdrawal. When the transferee does make a lump-sum withdrawal, their assessable period would be deemed to have begun when the deceased’s assessable period began.
Several submitters questioned how this proposal would relate to other parts of the Income Tax Act which deal with property transfers in the event of death or a relationship break-up.
In particular, other provisions in the Income Tax Act ensure that a transfer which occurs as part of a relationship agreement is, in certain circumstances, not a taxable event. Instead, the transferee takes on the cost base of the transferor and would need to account for this when they ultimately dispose of the asset.
Further, other provisions in the Act provide rollover relief only upon death in the situation where the interest is transferred to the surviving spouse, civil union partner, or de facto partner. (Again, in this situation, the surviving spouse, civil union partner, or de factor partner ‘steps into the shoes’ of the deceased and takes on their cost base).
Officials now consider that a better approach would be to broadly align the treatment of transfers upon death and relationship split with the treatment in other parts of the Act, with some minor modifications to ensure that the integrity of the proposed new rules is maintained.
Under this approach, a transfer of a foreign superannuation interest from one person to another would generally constitute a taxable event, as per the current drafting in the bill.
However, where the transfer occurs as a result of divorce, the end of a civil union, or the end of a de facto relationship and the transferee is a New Zealand resident, rollover relief would be provided. When a lump-sum withdrawal is ultimately made by the transferee, they would be taxed as though their assessable period had begun when their ex-partner’s assessable period began.
We also propose that where the transfer occurs upon the death of the transferor, rollover relief would be provided only where the transferee is a New Zealand resident and is the surviving spouse, civil union partner, or de factor partner. The assessable period would similarly be calculated from the beginning of the deceased’s assessable period. Transfers to any other person should be taxed when the transferor dies.
Officials consider that this would be broadly consistent with the existing approach for rollover relief in other parts of the Income Tax Act.
Recommendation
That the submission be accepted, subject to officials' comments.
Issue: Drafting clarification – transfer to a non-resident upon death
Clause 8
Submission
(KPMG)
Under the current drafting, the transfer of an interest from a New Zealand resident to a non-resident upon death would not be taxable. There should be confirmation that there would be permanent rollover relief on death where the beneficial interest transfers to a non-resident (KPMG).
Comment
As noted in the section above, the original policy intention was that when an interest in a foreign superannuation scheme is transferred upon death from a New Zealand resident to a non-resident, the transfer would be taxable according to the deceased’s assessable period.
The current drafting does not adequately reflect this policy intention and the provision will need to be adjusted.
Recommendation
That the submission be declined, but that the policy intention as outlined by officials should be clarified.
Issue: Provisional tax
No clause
Submission
(Ernst & Young, Financial Services Council, New Zealand Institute of Chartered Accountants, New Zealand Law Society)
Foreign superannuation withdrawals should not be considered when determining a taxpayer’s obligation under the provisional tax rules. The additional “withdrawal tax liability” should be excluded from the definition of “residual income tax”. (Financial Services Council, New Zealand Institute of Chartered Accountants, New Zealand Law Society).
The withdrawal tax liability described in CZ 21B (the 15% option) should be expressly excluded from the definition of residual income tax in YA 1 (Ernst & Young).
Comment
When a taxpayer has a residual tax liability of $2,500, they are required to account for the provisional tax rules.
A concern raised by one submitter is that if the withdrawal was made late in their income year, use-of-money interest would be applicable to the first two provisional tax instalments that were missed, as the tax legislation assumes it was received evenly throughout the year (New Zealand Institute of Chartered Accountants).
Officials note that this is only the case if the taxpayer is already considered to be a provisional taxpayer. If they are not a provisional taxpayer before the lump-sum withdrawal, then they would not be subject to any use-of-money interest for the missed provisional tax instalments. They would however be required to account for provisional tax rules in the following income year. Officials note that there are a number of ways in which provisional tax may be managed.
One submitter notes that a tax liability arising from use of the 15% option in relation to past non-compliance should not be included as residual income tax. This is because the income actually arose in a past year, but for the purposes of the 15% option the income would be deemed to arise in the 2013–14 or 2014–15 income year (Ernst & Young).
Officials note that there are no current exemptions for certain types of income under the provisional tax rules. Introducing an exemption for foreign superannuation withdrawals could create an unintended precedent.
The issue raised by submitters also exists in relation to other lump-sum payments, for example lump-sum compensatory payments from ACC. No relief from the provisional tax rules is provided for such payments. As such, any decision here would set a precedent for other lump-sum payments.
Recommendation
That the submission be declined.