Withdrawals from KiwiSaver

Clause 115

Issue: Optional withdrawals from KiwiSaver could trigger UK QROPS rules

Submission

(Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited, Charter Square Services, New Zealand Institute of Chartered Accountants, PricewaterhouseCoopers)

An agreement should exist between Inland Revenue and the United Kingdom’s HM Revenue and Customs regarding the possible interaction between the United Kingdom’s rules and the proposed KiwiSaver withdrawal mechanism (Charter Square Services).

Three submitters suggest that Inland Revenue should clarify the interaction with the UK QROPS rules (Accountants and Tax Agents Institute of New Zealand, Baucher Consulting Limited, New Zealand Institute of Chartered Accountants).

Alternatively, transfers of foreign superannuation funds from the UK into QROPS should not be taxed (PricewaterhouseCoopers).

One submitter states that transfers into KiwiSaver should not be taxed (KPMG)

Another submitter has submitted that there should be a legislative solution to ensure that the QROPS rules are not triggered (New Zealand Institute of Chartered Accountants).

One submitter states that any tax leakage from exempting transfers into QROPS would be insignificant as any UK tax paid should ordinarily be available as a foreign tax credit (PricewaterhouseCoopers).

A submitter also states that in having the proposed rules apply to transfers from UK superannuation schemes to New Zealand QROPS would result in additional reporting responsibilities in the United Kingdom (PricewaterhouseCoopers).

Comment

The “qualifying recognised overseas pensions schemes” (QROPS) regime is administered by the UK's HM Revenue and Customs (HMRC). It allows individuals with interests in UK pension schemes to transfer their interests to certain overseas schemes (QROPS) without incurring any UK tax charges. The majority of New Zealand superannuation schemes that qualify as QROPS are KiwiSaver schemes.

Once a person has transferred from a UK scheme to a QROPS, there are specific provisions relating to how an individual may access their funds. If the individual makes a withdrawal from the QROPS and was a UK resident in any of the five preceding income years, the withdrawal may be classed as an unauthorised withdrawal and may be subject to an unauthorised payment charge and surcharge of up to 55%.

The new rules for taxing foreign superannuation contained in this bill propose a mechanism that would allow a person who transfers their foreign superannuation into a KiwiSaver scheme, and who has a resulting tax liability, to withdraw a portion of their superannuation to pay that tax liability (the “withdrawal mechanism”). This is an optional facility that is intended to make it easier for people to meet their tax obligations. Taxpayers do not have to use the facility and can choose to pay their tax liability from other funds if they prefer.

One submitter states that in making a withdrawal from their KiwiSaver using the proposed withdrawal mechanism, an individual may trigger this QROPS penalty charge and the scheme could be delisted as a QROPS.

Officials have confirmed with HMRC that the introduction of the withdrawal mechanism would not impact the ability of KiwiSaver schemes to qualify as QROPS.

Officials understand that the penalty charges exist to protect the integrity of the UK’s tax system and pension regime, and that an exemption for the proposed withdrawal mechanism from the UK’s unauthorised payment charge and surcharge is unlikely.

However, we believe that the risk of triggering the unauthorised payment charge is relatively low and does not require a policy response of exempting transfers into QROPS from New Zealand tax.

First, the penalty charge is only levied by HMRC if the individual was a UK resident in any of the five income years before the withdrawal. Under the proposed legislation, individuals who transfer within the first four years of becoming New Zealand resident would have no New Zealand tax to pay and would therefore not need to utilise the proposed withdrawal facility.

Second, while there may be some overlap for a new migrant in the fifth year of residence the proportion of the transfer that is assessed as income is only 4.76%. At the top marginal tax rate of 33%, the effective tax rate on the transfer would be approximately 1.57%. As this is a low effective tax rate, we expect that most individuals should be able to satisfy their tax liability out of other funds rather than using the KiwiSaver withdrawal facility. This means that they would be able to avoid the QROPS unauthorised payment charge.

Officials consider this to be incorrect. Under the double tax agreement (DTA) between New Zealand and the UK, New Zealand usually has the sole right to tax such lump sums. This means that New Zealand is not required to provide a foreign tax credit and the taxpayer should apply to HMRC for a refund of UK tax paid.

The submitter also states that in having the proposed rules apply to transfers from UK superannuation schemes to New Zealand QROPS would result in additional reporting responsibilities in the United Kingdom (PricewaterhouseCoopers).

This is also incorrect as the proposed rules do not change the reporting requirements of the QROPS regime.

Recommendation

That the submission be declined.

Issue: KiwiSaver provider must be sufficiently satisfied before approving a withdrawal

Submission

(KPMG)

The requirement that the KiwiSaver provider must be sufficiently satisfied with the KiwiSaver member’s application to withdraw the amount of the tax liability before releasing the funds should be removed.

Comment

Officials consider this requirement to be necessary to maintain the integrity of the KiwiSaver rules.

Officials do not believe that this will be overly onerous for the provider. Schemes would require a statutory declaration from the member, and may require other evidence (such as a tax assessment) as considered appropriate by the provider.

Officials note that similar requirements appear in other provisions governing permitted withdrawals in the KiwiSaver Act 2006.

Recommendation

That the submission be declined.

Issue: Notification of withdrawal and payment to Inland Revenue

Submission

(Matter raised by officials)

KiwiSaver providers should be required to notify Inland Revenue upon allowing a withdrawal from KiwiSaver to pay a person’s tax liability and should also pay the amount directly to Inland Revenue if their systems allow them to do so.

Comment

The proposed withdrawal mechanism allows a KiwiSaver provider to approve a withdrawal from KiwiSaver to pay a person’s tax liability, in limited circumstances.

At the moment there is no requirement for KiwiSaver providers to notify Inland Revenue about the request or pay the amount directly to Inland Revenue. We consider that this is inappropriate as Inland Revenue may not be aware of an individual withdrawing an amount and failing to pay their tax liability.

We consider that requiring KiwiSaver providers to notify Inland Revenue upon allowing a withdrawal, and requiring them to pay the amount direct to Inland Revenue (if their systems allow it) will support the integrity of the KiwiSaver rules and ensure that the withdrawal mechanism operates as intended.

Recommendation

That the submission be accepted.

Issue: Student loan repayment obligation arising from a transfer of a foreign superannuation scheme into KiwiSaver

Submission

(Matter raised by officials)

When a taxpayer applies to their KiwiSaver provider to withdraw the amount of the tax liability arising from the transfer into KiwiSaver, they should also be able to withdraw an additional amount to meet a student loan repayment obligation. This should be limited to the amount of the student loan repayment obligation that is attributable to the assessable income in relation to the foreign superannuation transfer.

Comment

Where a portion of the foreign superannuation transfer is taxable income, a corresponding student loan repayment obligation may arise for that income year.

Officials consider that this is an appropriate result as the portion included in the income tax return is income derived by the person, and so should be taken into account when calculating such obligations.

However, officials acknowledge that taxpayers who transfer their foreign superannuation interest into KiwiSaver may experience further cash flow difficulties in meeting their student loan repayment obligations that arise from that transfer.

Officials therefore consider that when a taxpayer applies to their KiwiSaver provider to use the proposed withdrawal mechanism to pay their transfer tax liability, they should also be permitted to withdraw an applicable amount to meet their student loan repayment obligations, but only to the extent that it arises as a result of the transfer.

Recommendation

That the submission be accepted.

Issue: Time limit for withdrawal mechanism

Submission

(Matter raised by officials)

The time limit applying to when an application for a KiwiSaver withdrawal may be made should be amended so that the application must be made within two years of the ‘foreign superannuation withdrawal’ being included in the appropriate income tax return. For this reason, it should also be made clearer that the withdrawal mechanism is only available when the lump sum has been assessed as income.

Comment

The proposed legislation currently provides that, in order to use the proposed KiwiSaver withdrawal mechanism, the application to the KiwiSaver provider needs to be made within two years of the transfer.

However, the tax liability is only confirmed when the taxpayer returns the appropriate portion of the transfer in their income tax return and it is assessed as income.

Therefore officials consider it more appropriate for the two-year limit to start from when the lump sum has been assessed as income.

Recommendation

That the submission be accepted.

Issue: Is the withdrawal option available for partial transfers into KiwiSaver?

Submission

(Charter Square Services)

A taxpayer who has transferred their foreign superannuation into a non-KiwiSaver New Zealand superannuation scheme, should be able to use the KiwiSaver withdrawal option by first transferring the amount of the tax liability from the non-KiwiSaver scheme into a KiwiSaver scheme then making the application for withdrawal.

[Raised in the oral submission]

Comment

The withdrawal option is only available to taxpayers who have transferred into KiwiSaver schemes. There are a number of New Zealand superannuation schemes that are not part of the KiwiSaver regime.

The reason behind creating a withdrawal option for KiwiSaver is due to the ease of making an amendment to the KiwiSaver Act 2006. Extending the withdrawal option to non-KiwiSaver schemes would require amending the trust deed for each scheme. Officials note that there is nothing preventing non-KiwiSaver schemes from providing such a withdrawal facility without government intervention.

Some – although not many – of these non-KiwiSaver schemes qualify as QROPS under the UK’s ‘qualified recognised overseas pension schemes’ regime (for further information see ‘Issue: Withdrawals from KiwiSaver could trigger UK QROPS rules’). This means that a number of UK migrants may transfer into these schemes but would not have access to the KiwiSaver withdrawal option to pay their tax liability.

However, a taxpayer who has transferred to a non-KiwiSaver superannuation scheme may know what their liability arising from the transfer is. They may then transfer this exact amount of the tax liability from a non-KiwiSaver scheme to a KiwiSaver scheme and then use the withdrawal facility to withdraw that full amount and pay Inland Revenue.

The submitter notes that the current drafting of the proposed legislation does not prevent this from occurring.

Officials do not think that this will be a significant issue as the majority of transfers made by UK migrants will be into KiwiSaver schemes. Inland Revenue will monitor the situation to see if any problems will arise.

Recommendation

That the submission be noted.