Transitional issues and application date
Clauses 2(14), 8 and 103(9)
Issue: Grandparenting under the FIF rules–support
Submission
(New Zealand Institute of Chartered Accountants)
One submitter welcomes the ability for taxpayers who have complied with the FIF rules to continue using the FIF rules.
Comment
Officials note the submission.
Recommendation
That the submission be noted.
Issue: Recognising FIF tax already paid for taxpayers who choose not to use the grandparenting option
Submission
(Corporate Taxpayers Group, Ernst & Young, Financial Services Council, KPMG, New Zealand Institute of Chartered Accountants)
Where the FIF rules have been applied in an income year, the assessable period should commence from the following income year, if the person changes to the new rules (Ernst & Young, Financial Services Council, KPMG, New Zealand Institute of Chartered Accountants).
This could be achieved by adding the number of FIF-compliant years to a person’s exemption period to effectively extend the exemption period (Corporate Taxpayers Group).
Alternatively, a deduction should be allowed for tax on FIF income already paid with respect to that foreign superannuation interest. The amount of FIF income returned should be deducted from the value of the lump sum, or a tax credit should be allowed to offset tax already paid on attributed FIF income (Financial Services Council, Corporate Taxpayers Group, New Zealand Institute of Chartered Accountants, Ernst & Young).
A third option should be provided for taxpayers wishing to transition from the FIF rules into the new rules:
- Taxpayers undertake a wash-up calculation to ensure that tax is not underpaid to the extent that the taxpayer has made lump-sum withdrawals during the time they were calculating income under the FIF rules
- The 15% option should be available to compliant taxpayers who wish to transition out of the FIF rules
- Taxpayers would then apply the proposed new rules to any lump sum withdrawals made going forward. (Corporate Taxpayers Group).
Comment
The issue relates to taxpayers who currently have an interest in a foreign superannuation scheme and have returned FIF income in the past. Under the proposed new rules, those taxpayers would be able to continue using the FIF rules, as long as they complied with the FIF rules prior to 20 May 2013 (the date of introduction of the bill). All other taxpayers must account for tax under the new rules (that is, upon receipt).
Taxpayers who choose not to use the grandparenting provision could be subject to double taxation of the same income when they move from accounting for income under the FIF rules to paying tax under the proposed new rules. The underlying issue is that the new rules do not account for FIF tax already paid.
Officials note that under the FIF rules, no tax is paid when a withdrawal is ultimately made. The new rules propose allowing this tax treatment to continue for taxpayers who have already returned income under the FIF rules. This means that taxpayers who continue to use the FIF rules will not be overtaxed.
Officials acknowledge that there is potential for effective over-taxation if a person chooses to be taxed under the new rules instead of continuing to be taxed under the FIF rules.
However, it is not clear why a taxpayer would generally wish to use the new rules if they have already paid tax under the FIF rules. Officials do not consider that this is an issue that will arise in practice.
Recommendation
That the submission be declined.
Issue: “Turning off” the FIF rules for non-compliance in the past
Submission
(KPMG, Offen Advisors Limited, Owens Tax Advisors Limited)
The submitters are concerned at the potential for double taxation if Inland Revenue pursues past non-compliance in the case of a person who did not comply with the FIF rules and is subject to the new rules on lump sums received after 1 April 2014.
This issue does not apply to people who have already made a withdrawal.
One submitter suggests that the FIF rules should not apply where lump-sum withdrawals are taxed from 1 April 2014 under the new rules (KPMG).
Others submit that the legislation should be amended to ensure that only one regime –either the FIF regime or the proposed new regime – applies to withdrawals derived after 1 April 2014 (Offen Advisors Limited, Owens Tax Advisors Limited).
Comment
Officials expect that a large group of people have not accounted for income under the FIF rules in previous years.
The policy intention is that these taxpayers would be subject to the proposed new rules on any withdrawals made on or after 1 April 2014. It is not intended that these taxpayers would also be subject to audit activity on their unpaid FIF tax.
This is because the proposed rules for taxing lump sums would account for any tax that should have been paid on accrual, regardless of whether that tax was paid.
Officials agree that if these taxpayers were subject to the new rules on lump sums, but also remained liable for unpaid FIF tax in relation to that scheme, there would be an element of double taxation. This is undesirable.
It is also undesirable that taxpayers be subject to the FIF regime rather than the proposed new rules, if they do not meet the conditions for grandparenting.
Officials agree that, in these situations, the FIF rules should not apply to a person’s interest for past years if their interest is subject to the new rules. This proposal would ensure that taxpayers are not over-taxed, and also has the advantage of simplicity, which is consistent with the intent of the proposed rules.
(It should be noted that an exception to this would be where the taxpayer acquired the interest in the foreign superannuation scheme while already New Zealand resident. As noted in this report, officials consider that the receipts-based approach should be available only where the rights in the scheme were first acquired while non-resident. This means that these taxpayers would still be subject to the FIF rules and so would remain liable for unpaid FIF tax.)
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: 15% option should be available in cases where a lump sum has not been derived
Submission
(Offen Advisors Limited and Owens Tax Advisors Limited)
Taxpayers who did not comply with the FIF rules, and have not made a withdrawal by 31 March 2014 should be permitted to use the 15% option in relation to their foreign superannuation interest as if they had made a withdrawal. That is, they should be able to return 15% of the value of the FIF interest in respect of their past FIF obligations.
Comment
Officials note that the underlying problem is that there is potential for effective double taxation, if the person is subject to tax under the new rules.
Officials note that the proposal to waive previous FIF obligations (Issue: “Turning off” the FIF rules for non-compliance in the past) would address this problem.
Recommendation
That the submission be declined.
Issue: Cut-off date for grandparenting is not adequate
Submission
(Ernst & Young, Offen Advisors Limited, Owens Tax Advisors Limited)
The submitters argue that 20 May 2013 is not an appropriate cut-off date for the grandparenting provision.
One submitter states that there may be a number of taxpayers whose interests in foreign superannuation schemes have only just become FIF interests since the beginning of their 2012–13 income year (generally from 1 April 2012). This may be because they were previously transitional residents. Generally, the standard filing deadline for these taxpayers would be 7 July 2013 so many may have not yet filed their tax return by 20 May 2013. As a result, such taxpayers would have no opportunity to be grandparented (Ernst & Young).
The cut-off date for grandparenting under the FIF rules should instead be 7 July 2013 (Ernst & Young).
Taxpayers who previously did not comply with the FIF rules, and who return 15% of the value of the FIF interest in order to remedy this non-compliance, should be able to continue using the FIF rules from 1 April 2014. (Offen Advisors Limited, Owens Tax Advisors Limited).
Comment
The policy intention is to reduce complexity and minimise compliance costs, and to that end, all effected taxpayers should be brought into the new regime for taxing foreign superannuation interests.
However, some taxpayers have already complied with the FIF rules in the past in respect of their foreign superannuation interest.
To ensure that this group of taxpayers do not face increased compliance costs, the proposed legislation permits those taxpayers to continue using the FIF rules rather than requiring them to comply with the new regime.
This reasoning does not apply to taxpayers who have not yet returned any income under the FIF rules.
Officials are of the view that the date of introduction of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill (that is, 20 May 2013) is an appropriate date for grandparenting and that grandparenting should not be extended to other taxpayers.
One submitter noted that there is a small group of taxpayers who have only just become subject to the FIF rules from the 2012–13 year because they ceased to be a transitional resident during the 2012–¬13 income year, and who may not have submitted their tax return by 20 May 2013 so would not have the opportunity to be grandparented (Ernst & Young).
Officials note that such taxpayers would generally have no FIF income as they would not have had an “opening market value” for their scheme at the beginning of the income year. This means that they would be unlikely to have FIF tax to pay for the 2012–13 income year. The FIF grandparenting provision is therefore not necessary for these taxpayers, and officials consider that the new rules should apply to them.
Recommendation
That the submission be declined.
Issue: Grandparenting under the FIF rules when no FIF income or a FIF loss
Submission
(Corporate Taxpayers Group, Ernst & Young)
The legislation should clarify that grandparenting under the FIF rules should be available to taxpayers with no FIF income or a FIF loss is reduced to zero when filing a return.
Comment
In a small number of circumstances, a taxpayer may have complied with the FIF rules in relation to a foreign superannuation interest, but have no FIF or may have a FIF loss. This would not be included in the person’s tax return. It is not clear that they will be grandparented under the FIF rules, as the amount returned in these circumstances will be exactly zero.
Officials agree that taxpayers in this situation should be able to continue using the FIF rules.
Recommendation
That the submission be accepted.
Issue: Evidentiary standards for grandparenting under the FIF rules
Submission
(Corporate Taxpayers Group)
Further guidance needs to be provided on the evidentiary standards that must be satisfied for the purposes of grandparenting.
In particular, the submitter notes that Inland Revenue may not be aware that a taxpayer has complied with the FIF rules because where there is a double tax agreement in force, a FIF disclosure form is not required (Corporate Taxpayers Group).
Comment
Officials do not consider that any special rules are needed. The person must be able to show that they were subject to the FIF rules and complied with their obligations under the FIF rules, including correctly returning FIF income (if there was any) in respect of the FIF interest. Officials will include a comment to this effect in a Tax Information Bulletin or similar guidance following enactment.
Recommendation
That the submission be noted.
Issue: Earlier application date of new rules for certain withdrawals
Submission
(New Zealand Law Society)
Taxpayers should be permitted to apply the proposed new rules for any foreign superannuation withdrawal derived in the 2012–13 or 2013–14 income year. This means that for withdrawals derived in the period 1 April 2012 to 31 March 2014, taxpayers would have the two originally proposed options (15% and existing law) as well as a third option of using the schedule or formula method.
Comment
Officials note that the 15% option is already a concessionary option. Further, this proposal would add complexity to the transitional period as taxpayers would then need to consider three different methods when complying with their tax obligations.
Officials therefore do not consider that a third option is warranted.
Recommendation
That the submission be declined.
Issue: Application date
Submission
(Ernst & Young)
References to 1 April 2014 may cause confusion for taxpayers with non-standard balance dates. The legislation should expressly provide that the rules will apply from taxpayers’ 2014–15 income years.
Comment
The new rules apply for any withdrawals or transfers that are made on or after 1 April 2014. Officials consider that this is simple and easy for taxpayers to understand.
The submitter’s suggestions would mean that some taxpayers with non-standard balance dates could start the rules at a different date to other taxpayers, which is likely to be confusing for taxpayers and more difficult to administer.
Recommendation
That the submission be declined.