Proposed new tax rules for the holders of offshore superannuation schemes (Pharmacy Today – February 2014)

A bill currently before parliament includes changes to the tax rules relating to foreign superannuation funds held by NZ residents. Due to the complexity of the existing rules, many New Zealand residents have been blissfully unaware that a tax obligation even existed.

In a move for which the IRD should be commended, this new proposed legislation is intended to simplify the way superannuation funds are to be taxed. As part of the changes the IRD are also proposing an amnesty for those who have not paid tax in the past on withdrawals from such schemes whereby a concessionary rate will apply.

The new rules will apply to NZ residents who acquired foreign superannuation schemes while they were non resident. It is important to note that these rules only apply to employer related super schemes and not government paid social security pensions as these are generally dealt with upon receipt.

In the future tax will be levied on lump sums drawn from the foreign super schemes. The longer you have been living in NZ the more tax you will have to pay when you either make a withdrawal or transfer your pension to NZ.

What this means is that the longer you leave your pension offshore the greater amount of tax you will have to pay when you eventually bring those funds back to NZ.

Withdrawals within the first 4 years after you become resident will not be taxable. Once this 4 year exemption period ends, the tax liability on a withdrawal will generally be calculated using a new “schedule method”. This method provides a particular fraction based on how long the person has been resident in NZ prior to the withdrawal.

If you transfer your super savings to a kiwisaver fund in NZ then you will be able to withdraw funds from the transferred amount to pay the tax liability arising.

Foreign super schemes have always been subject to NZ taxes. However, the IRD recognise that due to the existing rules being so complex, many people have inadvertently made cash withdrawals without accounting for tax and have filed tax returns without even advising the IRD of their investment in the foreign super scheme. So the IRD have introduced a concessionary rate where only 15% of the lump sum withdrawn from 1 January 2000 to 31 March 2014 is subject to tax – this is a simple option that is intended to encourage compliance before the introduction of the new rules.

To use this option you will need to return the 15% of the lump sum amount in your 2013/14 or 2014/15 tax returns. If you do not use the option to pay tax on 15% of the lump sum then the law as it was at the time the withdrawal was made will apply. The original due date for payment of tax will also still apply.

If you are a member of an overseas superannuation scheme and it has not been included in your tax returns in the past then please contact your advisors immediately to establish your position and options.

Published in Pharmacy Today February 2014 written by Belinda Canton.

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