New Zealand: New Zealand to effect significant changes to taxation of foreign superannuation interests
Greg Neill, Russell McVeagh
Under existing law, New Zealand individuals with interests in foreign superannuation schemes may be subject to tax in respect of those interests on an accrual basis, rather than being taxed only on distributions from the scheme. In addition, the circumstances in which a distribution from such a scheme is taxable are presently uncertain. Because of this uncertainty, and the complexity of the rules, there has historically been a high level of non-compliance by New Zealand taxpayers in relation to their interests in foreign superannuation schemes.
The New Zealand government is therefore undertaking a law change which would see a shift to a new system under which taxpayers are subject to tax only on distributions from foreign superannuation schemes. The law change is reflected in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill introduced in May 2013 and the changes will apply from the 2014-2015 income year.
Under the new system, a person will be taxed when they derive a "foreign superannuation withdrawal" from their foreign superannuation interest. Such a withdrawal includes any amount derived by the person from the scheme (whether by way of lump sum or periodic payment) or any amount transferred from a foreign scheme to a New Zealand or Australian superannuation scheme. Transfers to Australian schemes are included because withdrawals by New Zealand residents from Australian schemes are exempt from tax.
It is proposed that any person newly resident in New Zealand, or any person that has returned to New Zealand with a foreign superannuation interest acquired while non-resident, may receive a tax-free withdrawal of their interest if that withdrawal is made within 48 months of becoming resident in New Zealand.
If the withdrawal is subject to tax because of the expiry of the 48 month period, taxpayers have the option of applying either the default schedule method or the more involved formula method to calculate how much of the withdrawal is assessable. Both methods are designed to provide an approximation of the New Zealand tax that would have been payable had the person transferred their interest to a New Zealand scheme on the date they first became resident in New Zealand. The formula method allows taxpayers to use information specific to their foreign superannuation interest, whereas the schedule method requires taxpayers to apply a specified rate depending on how many income years have passed since they became resident in New Zealand.
The Bill also provides an effective amnesty for taxpayers who received lump sum distributions between January 1 2000 and March 31 2014 but did not comply with their tax obligations at the time. Those taxpayers have the choice of applying the law at the time of the distribution or being taxed on 15% of the distribution received.
The Bill addresses several of the initial concerns expressed in relation to the new proposals. For example, in relation to a transfer of funds from a foreign scheme to a New Zealand scheme, taxpayers will now be permitted access to such funds to pay any resulting tax liability. However, certain aspects remain problematic. For example, the use of a prospective period of amnesty is unusual given that the amnesty is there to address incidences of historical non-compliance.
The Bill is before the Select Committee and its report on the Bill is expected later this year.
Greg Neill (firstname.lastname@example.org)
Tel: +64 9 367 8879
Fax: +64 9 336 5010
Mobile: +64 21 0260 5417