The law change is reflected in the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 which received Royal assent on February 27 2014. The new laws will apply from April 1 2014, being the first day of the 2014-2015 New Zealand tax year.
As noted in last October's issue of International Tax Review, the law reform in this area was proposed because of the uncertainty and complexity associated with the current rules. There has historically been a high level of non-compliance by New Zealand taxpayers in relation to their interests in foreign superannuation schemes as a result. The policy objective for the law change is therefore to make the rules for taxing such interests simpler and fairer.
Under the new law, taxpayers are subject to tax only on distributions or transfers from foreign superannuation schemes rather than on an accrual basis (which could potentially have been the case under existing law). In broad terms, the new system will operate as follows:
- A person will be taxed when the person derives a foreign superannuation withdrawal from a foreign superannuation interest. This includes any amount derived by the person from the scheme, whether by way of lump sum or periodic payment, including any amount transferred from a foreign scheme to a New Zealand or Australian scheme.
- 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 the person's interest if that withdrawal is made within the applicable exemption period (generally the first approximately 48 months of becoming resident in New Zealand).
- Once the exemption period has expired, taxpayers have the option of applying one of two methods 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 the interest to a New Zealand scheme on the date the person first became resident in New Zealand. Consequently, the longer the period the person has been resident in New Zealand before making the withdrawal, the greater the percentage of the withdrawal will be assessable.
One notable difference between the law as enacted and that originally proposed in the Bill relates to the option provided to a taxpayer who received a withdrawal (other than a pension or annuity) between January 1 2000 and March 31 2014, but did not return the withdrawal as income in the year in which it was derived. Those taxpayers have the choice of applying the law at the time of the withdrawal and paying tax in respect of the income year in which the withdrawal was derived, or treating 15% of all such withdrawals as income, and returning the income in either the 2013-2014 year or the 2014-2015 year.
Changes made to the Bill before its enactment extend the availability of the 15% option to taxpayers that have merely submitted an application for a withdrawal from a foreign superannuation scheme prior to April 1 2014, rather than requiring the withdrawal to have been made before that date. That change provides welcome relief to those taxpayers seeking to utilise the 15% option as there would otherwise have been a significant (and potentially insurmountable) administrative burden involved with a requested withdrawal being processed prior to April 1 2014.