Trans-Tasman portability of retirement savings
TIMEFRAMES TO IMPLEMENT THE NEW LEGISLATION
Submission
(ASB)
New Zealand-sourced retirement savings may not be transferred from Australia to a third country. This will require communication and amendments to current disclosure material in order to comply with securities legislation. The amendment process means that providers are required to amend and reprint documentation, including investment statements and prospectuses. Therefore, providers should have a suitable timeframe to implement the new legislation.
Alternatively, an exemption should be provided so that the changes do not require existing disclosure documents to be updated until the proposed rules are enacted and come into force.
Comment
Participation in the trans-Tasman portability facility will be voluntary for providers, so providers have flexibility regarding if and when they choose to offer this facility. The timeframes for implementation are, therefore, within providers’ control. If it is not considered viable to reprint documentation upon enactment, later implementation by providers is possible.
Recommendation
That the submission be declined.
NON-ALIGNMENT OF INVESTMENT INCOME TAX RATES
Submissions
(ING, Workplace Savings NZ, KPMG)
If New Zealand is serious about encouraging the consolidation of retirement savings accounts here, further consideration needs to be given to aligning tax rates on investment income with the rate payable in Australia.
The recent Tax Working Group report suggested that New Zealand is currently reliant on taxing factors most harmful to economic growth, including income from capital (savings). A debate on New Zealand’s savings policy, and the role of tax, needs to occur. (KPMG)
Comment
Portability is designed to assist labour market mobility and contribute towards achieving a single economic market with Australia. It does not aim to achieve equal tax treatment on retirement savings.
New Zealand and Australia apply different tax rates to earnings on retirement savings, with Australia’s rate being lower. However Australia also taxes capital gains on equities, whereas New Zealand does not tax capital gains on Australasian equities. It is therefore not straightforward to make a comparison between the two tax regimes, or to conclude that the Australian tax environment for superannuation savings is more favourable than New Zealand’s.
In addition, there are a number of factors other than the tax rate that may encourage members to transfer their savings. For example, individuals with Australian savings benefit from transferring them to New Zealand as they avoid paying multiple administration and management fees on their savings, and are able to manage more easily their savings if they are consolidated in one account in their country of residence.
Recommendation
That the submissions be declined.
WITHDRAWAL IN CASH AFTER EMIGRATION TO AUSTRALIA
Submissions
(PricewaterhouseCoopers, New Zealand Institute of Chartered Accountants)
New Zealanders who permanently migrate to Australia should have the choice of transferring their retirement savings to an Australian superannuation scheme or withdrawing their savings entirely.
This would be consistent with the original framework of the KiwiSaver regime. Furthermore, the portability of superannuation to Australian complying schemes should not remove existing rights. Individuals who permanently migrate to Australia should not be disadvantaged compared with individuals who migrate to other countries.
Comment
The introduction of retirement savings portability will support an integrated single superannuation market between the two countries by allowing New Zealanders and Australians to consolidate their financial affairs in their country of residence. Superannuation portability also builds on the unique relationship between New Zealand and Australia by supporting trans-Tasman labour mobility.
To allow the cash withdrawal of savings would compromise an objective of trans-Tasman portability, which is to assist and encourage retirement savings after emigration. A key feature of both the Australian complying superannuation scheme and the New Zealand KiwiSaver scheme is that savings are locked in until retirement age. This would also undermine the concept of an integrated single superannuation market: allowing cash withdrawals on trans-Tasman emigration would be equivalent to allowing cash withdrawals on migration within New Zealand, which is not allowed.
Recommendation
That the submissions be declined.
RING-FENCING AUSTRALIAN-SOURCED SUPERANNUATION SAVINGS
Submission
(ASB)
For providers to separately administer funds transferred from Australian superannuation schemes, further registry development, testing and time will be required. To reduce the costs and complexities of KiwiSaver administration, transferred Australian savings should be administered under the existing KiwiSaver rules. This change will ensure ease of implementation, less confusion for members and less risk of error, and will help to ease the cost of implementing further complexities to registry systems.
Comment
The arrangement on portability between New Zealand and Australia specifies that savings transferred to New Zealand may not be used to assist with the purchase of a first home or be transferred to a third country. Also, a member retains the right to access their transferred savings at 60 years of age (if they meet the Australian definition of “retirement”). These provisions are a core feature of the portability arrangements, and will ensure that portability supports labour market mobility instead of being used to take advantage of regulatory and policy differences between New Zealand and Australia.
After consultation with industry representatives, officials consider that the requirement to identify separately the original transferred amount of savings will not result in high costs and complexity for scheme providers.
Recommendation
That the submission be declined.
COMPLYING SUPERANNUATION FUNDS EXCLUDED FROM PORTABILITY
Submissions
(Chapman Tripp, ING, Workplace Savings NZ)
As complying superannuation funds essentially operate in the same way as KiwiSaver schemes, there is no persuasive policy reason for excluding them from the trans-Tasman savings portability facility.
The portability arrangements should, at a minimum, allow transfers direct from complying superannuation funds to Australian superannuation schemes. (Chapman Tripp)
The extension of this facility to complying superannuation funds should be included in future discussions with Australian officials. (Workplace Savings NZ)
Comment
Officials agree that in policy terms complying superannuation funds should be allowed to offer the portability facility. However, as the arrangement between New Zealand and Australia only refers to KiwiSaver schemes, a decision would need to be made jointly between the two countries to include complying superannuation funds.
Officials will raise this matter with Australia.
Recommendation
That the submissions be noted.
REALLOCATION OF SAVINGS IF MEMBERSHIP CONSIDERED INVALID
Submission
(Workplace Savings NZ)
Clauses 75 and 76 of the bill involve “net” amounts to be paid if an individual’s membership is found to be invalid. This potentially undermines the simplicity principle and could, in many cases, require registry system changes of a significant and costly nature.
It would be preferable to retain the simplicity of the “amount transferred” (disregarding subsequent investment returns) in these sections if possible, thereby avoiding the need for additional record keeping.
Comment
Officials recognise that this presents concern for providers, as it would require additional data and potentially complex accounting.
Officials agree with the approach suggested in the submission because it is consistent with the current invalid membership rules.
Recommendation
That the submission be accepted, subject to officials’ comments.
TRANSFERS BACK TO AUSTRALIA IF MEMBERSHIP CONSIDERED INVALID
Submissions
(Chapman Trip, Workplace Savings NZ)
The bill proposes that if an invalid KiwiSaver enrolment is not later validated under the KiwiSaver Act’s provisions, any net amount transferred from an Australian scheme must be transferred back to that scheme. This will be impossible where that scheme, for example, does not allow transfers back from KiwiSaver or otherwise refuses to accept the transferred amount. The Australian scheme may also have been wound up after the transfer.
An affected individual should be able to nominate another Australian complying superannuation scheme or, if this does not happen, Inland Revenue should be able to choose a default Australian scheme (and then notify the member).
Comment
Officials agree that an affected individual should be able to nominate another Australian superannuation scheme if their original Australian provider will not accept the transfer or no longer exists.
The transfer of savings back to Australia, if an individual’s KiwiSaver membership is found to be invalid, would be administered by the provider and not Inland Revenue. This is because providers would have the direct relationship with both the member and the Australian scheme provider. This will be noted in Inland Revenue’s Tax Information Bulletin.
Recommendation
That the submissions be accepted.
TRANSFERS IN EXCESS OF AUSTRALIA’S CONTRIBUTION THRESHOLD
Submissions
(PricewaterhouseCoopers, Workplace Savings NZ)
Individuals who migrate to Australia should be allowed to withdraw their KiwiSaver savings in part, to avoid being taxed on contributions in excess of the Australian contribution threshold. (PricewaterhouseCoopers)
Amounts transferred from KiwiSaver schemes to Australia should be exempt from the Australian “contributions cap”, as there is little scope for abuse of the Australian tax system from excessive contributions made during this process. The exemption of such transfers should be discussed with Australian officials at some point in the future. It is not likely to be an issue in the immediate future but may become so as savers build their KiwiSaver balances. (Workplace Savings NZ)
Comment
Currently, officials do not consider that this is a major concern because the low dollar amounts in the KiwiSaver accounts that may be transferred. However, as these amounts grow in the future, the contributions cap may become an issue. Consequently, officials may raise this with Australian officials in the future.
Recommendation
That the submissions be declined but note that New Zealand officials may raise this issue with Australian officials in the future.
FEES FIRST DEDUCTED FROM NEW ZEALAND-SOURCED SAVINGS
Submissions
(Workplace Savings NZ, Chapman Tripp)
Proposed clause 2B of the KiwiSaver scheme rules requires fees to be first deducted from the net value of amounts not transferred from Australia. This is unreasonable and impractical as it would necessitate duplicate unit prices within KiwiSaver schemes. The costs associated with attempting to comply with such a requirement may preclude providers from offering this service.
Clause 2B should be reworded to provide that fees cannot be deducted from the amount transferred from Australia to a greater extent than in proportion to the total value of the member’s accumulation in the scheme at the time. (Workplace Savings NZ)
The requirement that fees be deducted first from New Zealand-sourced savings (in proposed clause 2B) seems unworkable, as it would necessitate duplicate unit prices within KiwiSaver schemes. Proposed clause 2B should be deleted. (Chapman Tripp)
Comment
Officials agree that there are potential difficulties for providers in the identification and administration of separate fees, and that clause 2B should be deleted.
Recommendation
That the submissions be accepted.
SECTION CW 29B – INCOME COMPONENT OF THE TRANSFERRED AMOUNT
Submission
(New Zealand Institute of Chartered Accountants)
It may not be clear what part of the amount transferred from the Australian complying superannuation scheme is the income component. The rules to determine the taxable dividend in section CD 22(5) of the Income Tax Act 2007 rely on the cost of the interest, which may not be easily determined. To ensure no doubt or ambiguity, a better approach would be to refer to an “amount”. As the amount originates from a transfer of funds, the language of section CW 29B should be consistent.
Comment
Because the provisions in the Income Tax Act only tax income, officials consider that the current wording of proposed section CW 29B is correct. The reference to income in proposed section CW 29B is also consistent with other exemption provisions, in particular, section CW 29.
Recommendation
That the submission be declined.
SECTION MK 8 – PAYING MEMBER TAX CREDITS TO COMMISSIONER AFTER EMIGRATION
Submission
(New Zealand Law Society)
Section MK 8 should be amended to clarify that it does not apply to a transfer under proposed clause 14B, schedule 1 of the KiwiSaver Act 2006.
Comment
Existing section MK 8 provides that, on the transfer or cash withdrawal of a member’s savings after their permanent emigration from New Zealand, a provider must pay the individual’s member tax credits to the Commissioner.
Officials agree that, in the absence of any amendment, section MK 8 may also apply after permanent emigration to Australia under proposed clause 14B of the KiwiSaver scheme rules. Because this is not intended, section MK 8 should be amended accordingly.
Recommendation
That the submission be accepted.
DEFINITION OF “AUSTRALIAN COMPLYING SUPERANNUATION SCHEME”
Submissions
(New Zealand Law Society, New Zealand Institute of Chartered Accountants)
As Australia’s Superannuation Industry (Supervision) Act 1993 contains multiple divisions labelled “Division 2”, the proposed definition of “Australian complying superannuation scheme” in the Income Tax Act 2007 and the KiwiSaver Act 2006 should be amended to refer to a specific part of the Australian Act.
Comment
Officials agree that the cross-reference is not clear. The legislation should be amended to refer to Division 2 of Part 5 of the Superannuation Industry (Supervision) Act 1993 (Aust).
Recommendation
That the submissions be accepted.
DEFINITION OF “RETIREMENT” TO AVOID CROSS-REFERENCE
Submission
(Workplace Savings NZ)
Clause 80 of the bill introduces a new clause 4B in schedule 1 of the KiwiSaver Act. This introduces a cross-reference to Australian legislation for the term “retirement”. It would be preferable to define retirement in clause 4B, thus avoiding the cross-reference. It is recognised that this might then lead to an amendment being required if the relevant Australian legislation is changed at some future date.
Comment
If the definition of Australian retirement is included in the KiwiSaver Act, the Act would no longer refer to the source Australian legislation. As noted in the submission, if Australia changes its definition, the KiwiSaver Act would need to be amended also. For this reason, officials consider that the cross-reference linking to the source legislation is needed to future-proof the definition.
To ensure users’ understanding of the legislation, the Australian definition of retirement will be explained in Inland Revenue’s Tax Information Bulletin.
Recommendation
That the submission be declined.
CLAUSE 80 – CLARIFICATION OF “NECESSARY MODIFICATION”
Submission
(Workplace Savings NZ)
Clause 80 refers to “necessary modifications” for KiwiSaver scheme trustees. It is not clear what this might cover, so clarification is desired.
Comment
Australian savings can be withdrawn when an individual is retired according to the definition of “retirement” in the Australian legislation. To ensure that providers do not face onerous compliance costs in checking whether an individual meets the Australian definition of “retirement”, some flexibility has been built into the KiwiSaver Act with the term “necessary modification”. For example, to meet the requirement that the trustees of a KiwiSaver scheme be reasonably satisfied that an individual does not intend to become gainfully employed ever again, a statutory declaration signed by the member could be considered sufficient.
The flexibility afforded by the “necessary modification” wording may also mean that KiwiSaver scheme providers do not need to expend resources investigating and policing a member’s eligibility for retirement in each individual case.
Recommendation
That the submission be noted.
PROVISION FOR NON-PERMANENT EMIGRATION
Submission
(New Zealand Institute of Chartered Accountants)
There is no provision in the rules that deals with the situation when emigration transpires not to be permanent. For example, Mr and Mrs A emigrate permanently to Australia. Both transfer their KiwiSaver balances to Australian complying funds. However, after a period of years the relationship breaks down and Mr A returns to New Zealand. Technically the requirements to transfer the fund balance are no longer met as emigration was not permanent. A provision is required for when emigration transpires not to be permanent.
On the other hand, if the test is to be at the time of emigration, then the legislation should state this.
Comment
Whether an individual has permanently emigrated is tested at the time of application to transfer their KiwiSaver savings. The fact that an individual later returns to New Zealand does not mean that emigration was not permanent at the time of application. Officials do not consider that a further amendment is necessary.
Recommendation
That the submission be declined.