Pension transfers received from overseas by New Zealand residents will face an “effective tax rate” of up to 33 per cent, if proposed reforms to the taxation of foreign superannuation go ahead, the Inland Revenue Department (IRD) has confirmed to iExpats.com.
The country’s tax authority has also told us that the tax implications are to be retrospective.
However, the IRD admits that there remains ambiguity whether certain schemes, including QROPS transfers from the UK to New Zealand, can be taxed under current legislation.
“The extent of taxation will depend on how long the person has been in New Zealand for before they transfer. Only a portion of the transferred amount will be included in a person’s taxable income. This will begin from zero per cent being included in the early years to 100 per cent being included after 25 plus years of residence. The effective tax rate will be between zero percent and 33 percent,” explains the IRD’s David Miller.
He continues. “There is uncertainty around whether, for New Zealand tax purposes, UK superannuation schemes can be classified as ‘locked-in’. If they are locked-in, distributions (including transfers) from the UK to a New Zealand QROPS are taxable under existing law.
“New Zealand’s tax rules in this area can be complex, and for some people, this may lead to the entire amount being taxable, with no allowance for their contributions.”
So, in real terms, how will this affect those who have already transferred funds to New Zealand?
Mr Milner says: “People who previously transferred to New Zealand, and either paid tax annually, under our foreign investment fund rules, or paid tax on the transfer will have no further tax to pay.
“People who previously transferred but did not comply with their tax obligations will have a period of time in which to make a voluntary disclosure to Inland Revenue about the transfer and in which to pay the tax owing.
“It is not known how many people this will impact.”
New Zealand residents
The IRD says that the proposals will affect people who are New Zealand residents and who transfer, or withdraw, their funds from a foreign superannuation scheme.
New migrants, who have not been New Zealand residents for at least ten years, will receive an exemption from New Zealand tax for the first four years. The proposed reforms will not impact people with Australian superannuation.
The proposals have, according to the IRD, been drafted to address concerns among tax practitioners and the public that the current rules are too complex and difficult to understand.
“As many people did not pay tax on previous transfers, these individuals may be subject to compliance and audit activity by Inland Revenue. Consequently, many people may have had large tax bills to pay under the existing law, in addition to interest and penalty charges.
“Instead of Inland Revenue undertaking an audit, the reforms commenced last year to provide a simpler and less burdensome way for people to comply with their tax obligations,” states the spokesman.
Specifically regarding the UK, he adds: “The proposed reform is consistent with the (1984 double tax) agreement between the UK and New Zealand and New Zealand retains the right to tax pensions/annuities and transfers from the UK.”
