If you have lived in New Zealand for over four years and you still have a Foreign Superannuation Fund and haven’t paid any New Zealand tax on it – it might be beneficial to either cash-up the fund or transfer it to a New Zealand fund, before 1st April 2014.
These considerations arise from future changes designed to simplify the taxation of foreign superannuation schemes and are planned to take effect from 1st April 2014.
The current rules tax foreign superannuation schemes under the Foreign Investment Fund (FIF) rules, which due to their complexity, result in a high level of non-compliance.
The new rules will contain transitional provisions for lump sum pay-outs or transfers to New Zealand Schemes made between 1st January 2000 and 31st March 2014. In cases where these pay-outs and transfers have been made from foreign superannuation schemes which have not been taxed under the FIF rules, a 15% transitional fraction will be applied to the pay-outs or transfers to calculate extra assessable income of the individual.
Under the new rules any lump sum pay-outs or transfers to New Zealand schemes occurring after 31st March 2014 will be taxed on receipt, using one of two new calculation methods: ‘The Schedule Method’ or ‘The Formula Method’.
Under these new methods, the portion of the pay-out or transfer that is subject to tax increases with the passage of time (to a maximum of 100% assessable after Schedule Year 25). Under the Schedule Method, the number of years between the expiry date of the four-year exempt period to the date of pay-out or transfer is the Schedule Year (a stated number of years). A table has been developed to provide the Schedule Year Fraction that relates to each Schedule Year.
Example: A New Zealand citizen had been living and working outside of New Zealand for a number of years. He returned to New Zealand (resumed Tax Residency here) in 1998. While he was overseas the person had saved $100,000 in his foreign superannuation fund. Since his return he has not complied with New Zealand tax law in relation to the Superannuation fund. If he cashes up the fund or transfers it to a New Zealand superannuation fund sometime between 1 January 2000 and 31 March 2014, his assessable income will increase by $15,000. If he is on the 33% tax rate, his tax liability will increase by $4,950.
Alternatively, if he waits until 2020 to cash-up or transfer his Foreign Superannuation Scheme, the Schedule Year is 18 (22 years less four-year exempt period) with a corresponding Schedule Year Fraction of 75.17%. This means that his assessable income will increase by $75,170, and if he is on the 33% tax rate, his tax liability will increase by $24,806.
Any future pay-outs from his New Zealand Scheme (lump sum or pensions) will be tax exempt.
These considerations apply equally to anyone who has taken up residency in New Zealand and still has savings in a foreign superannuation scheme or has already transferred or cashed up a foreign superannuation scheme since 1 January 2000.
Please contact us if you would like us to look at your particular circumstances.
UHY Haines Norton’s Head of Tax Jim Martin can be contacted at email@example.com.