NZ tax residents who have interests in foreign superannuation are often presented with the headache of taxation. There are different tax rules that can be applied to foreign superannuation.
Depending on which set of rules apply, the foreign superannuation may be taxed either on the change in the value of the investment in NZ$ on an annual basis under the FIF rules or at the time the individual receives income (i.e. lump sum, regular pension payment, withdrawal or transfer to another scheme). This creates complexity and uncertainty for the tax payers.
An issue paper was released in July 2012 by the NZ Inland Revenue Department in which new simple taxation rules were proposed. It is proposed that the FIF rules will no longer apply to the foreign superannuation and that the liability to taxation be determined at the time the pension payment or a lump sum is received or when the foreign superannuation is transferred to another scheme.
In simple terms it is proposed that a foreign pension payment will be taxed at the time it is received at the recipient’s marginal tax rate (ranging 10.5% to 33%). A lump sum withdrawal or a transfer from a foreign superannuation will be apportioned, based on how long the person has been in New Zealand before a withdrawal or a transfer was made, and taxed accordingly. This means that a lump sum withdrawal and a transfer will be apportioned and only a certain portion of the amount will be taxable in New Zealand. The longer the person spent in New Zealand the greater the proportion of the amount that will be included in the taxable income. The proportion of the lump sum that will be included in the taxable income will range from 0% (in first two years) to 100% (after 25 years).
The effect of these proposals on Transitional Residents & Australian Superannuation:
- There will be no adverse effect on Transitional residents, as their foreign superannuation, including withdrawals or transfers are not taxed while they are Transitional Residents, which is basically 4 years from when they first become a transitional resident.
Transfers from Australian Superannuation Scheme to NZ
- An interest in Australian superannuation scheme, in general, would not be taxable under the FIF rules.
- For the purposes of New Zealand / Australia Double Tax Agreement, lump sum payments received from Australian retirement benefit schemes are not taxable in New Zealand. Therefore a person would not be taxable in New Zealand under the new rules.
- Should the New Zealand/ Australia Double Tax Agreement not apply to the individual, transfers from Australian superannuation scheme to a NZ Kiwisaver scheme may still be tax free under the agreement on the portability of savings between New Zealand and Australia (which should come into effect shortly).
The new rules are to apply to income received from a foreign superannuation scheme including pension payments, withdrawals and transfers to another scheme) on or after 01 April 2011. FIF rules will continue to apply if foreign superannuation was taxed under the FIF rules in 2010/11 income year. Special rules may apply to transfers or withdrawals of foreign superannuation made between 01 Jan 2000 – 31 Mar 2011