Taxation of foreign superannuation
Issue: Support for changes
Clauses 71 and 213
Submission
(KPMG, PwC)
The submitters support the proposed change that the new foreign superannuation rules, rather than the FIF rules, apply to an interest in a foreign superannuation scheme while the person is a New Zealand tax resident for domestic law purposes, but is considered to be non-resident for the purposes of a double tax agreement.
KPMG expressed general support for the proposed amendments that:
- reinstate the FIF exemption for Australian regulated superannuation schemes;
- allow individuals below the minimum FIF threshold of $50,000 to use the foreign superannuation rules for determining their tax liability; and
- confirm that where pensions have been returned as taxable income prior to 1 April 2014, individuals will not be penalised for non-compliance under the FIF rules.
Submission
Officials welcome support for the proposed changes in the bill.
Recommendation
That the submission be noted.
Issue: Residence test under double tax agreements – drafting
Clauses 71 and 213
Submission
(PwC)
The wording in the proposed amendment to section CF 3 that the foreign superannuation rules should apply where a person is a New Zealand resident under domestic tax law, but treated as non-resident under a double tax agreement when they acquire the rights in their foreign superannuation scheme should be revised to be more technically correct.
The proposed amendment includes the phrase “when the person is a non-resident or is treated under a double tax agreement as not being resident in New Zealand”.
From a technical perspective, a person is not treated as being a non-resident of New Zealand under a double tax agreement, but rather, they are treated solely as being a resident of the other jurisdiction for the purposes of the double tax agreement. We propose that the wording should be amended to read “or is treated under a double tax agreement as a resident solely of the Contracting State other than New Zealand”.
Comment
The Income Tax Act 2007 contains a number of references to New Zealand’s double tax agreements, and in particular, to situations when dual-residence has been dealt with by a double tax agreement.
Officials have undertaken a survey of these references and it does not appear that the use of the phrase “is treated under a double tax agreement as a resident solely of the Contracting State other than New Zealand” or something similar has been used before.
Officials note that the phrase “treated under a double tax agreement as not being resident in New Zealand” is used elsewhere in the Income Tax Act 2007, and therefore do not consider that any further amendment is required. However, a slight variation has also been used, which refers to treatment under, and for the purposes of, a double tax agreement. The use of this variation may provide additional clarity and officials have raised this with drafters.
Recommendation
That the submission be noted, and the matter referred to drafters.
Issue: Low-value FIF superannuation interest – transfers into KiwiSaver should be exempt
Clause 71
Submission
(Baucher Consulting Limited)
A transfer of a low-value FIF superannuation interest to a KiwiSaver scheme should be treated as an exempt transfer.
Comment
A similar submission was made when the foreign superannuation rules were considered by the Committee as part of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill. The Committee declined the submission that transfers into locked-in New Zealand superannuation schemes (for example, KiwiSaver) should be exempt from New Zealand tax. Officials noted at page 24 of the Officials’ Report that “exempting transfers into locked-in schemes would create a significant inequity between New Zealand residents with foreign superannuation schemes and those with other financial assets such as New Zealand superannuation schemes, shares, or bank deposits”.
This argument applies to all transfers into locked-in schemes, including transfers of low-value FIF superannuation interests into KiwiSaver schemes.
Officials note that a low-value FIF superannuation interest is not a FIF superannuation interest that is valued at less than $50,000, but rather a FIF superannuation interest where the total value of all of the person’s interests in FIFs is less than $50,000. Exempting the transfer of a low-value FIF superannuation interest would raise significant equity concerns, not only between foreign superannuation schemes and other financial assets, but also between low-value FIF superannuation interests that would be exempt from tax under the submitter’s proposal and foreign superannuation schemes that are taxed on receipt under the foreign superannuation rules or on an annual basis under the FIF rules.
Officials also consider that the submitter’s proposal would encourage New Zealand residents to accumulate funds offshore in a foreign superannuation scheme and only transfer their funds to a KiwiSaver scheme immediately before they are able (and wish) to use their funds, without paying any New Zealand tax.
Recommendation
That the submission be declined.
Issue: Low-value FIF superannuation interest – formula method should be available
Clauses 71 and 213
Submission
(Baucher Consulting Limited, KPMG)
A person should be able to use the formula method to calculate the tax payable in relation to their low-value FIF superannuation interest.
Comment
The FIF rules apply to a foreign superannuation interest that has been acquired while a person is a New Zealand resident. This ensures that the FIF rules that apply to foreign portfolio investments held by New Zealand residents are not undermined.
A minimum threshold is available in the FIF rules, whereby an individual is not required to pay tax on an accrual basis under the FIF rules if the total cost of their interests in FIFs is less than $50,000. Instead, tax is paid on receipt of any distributions from their FIFs under other tax rules that may apply to their interest (such as the rules for distributions from trusts or companies). The aim of this minimum threshold is to reduce compliance costs for those with relatively small foreign investments, as these people are likely to be unsophisticated investors.
The bill proposes to introduce the concept of a “low-value FIF superannuation interest” to mitigate some of the complexities of the FIF minimum threshold. As the minimum threshold is intended to reduce compliance costs for taxpayers, allowing a person to apply the schedule method in relation to their low-value FIF superannuation interest would be a balanced approach in reducing some of the complexities of the FIF minimum threshold as it applies to foreign superannuation interests, while also maintaining the integrity of the FIF rules.
Officials consider that allowing taxpayers with low-value FIF superannuation interests to use the formula method would not be in line with the aim of the FIF minimum threshold to reduce compliance costs for taxpayers, because the formula method requires a person to have substantial information about their scheme.
In addition, the FIF minimum threshold is not compulsory and it is possible for people to opt out of the threshold into the accrual rules, if they are able and would like to return accurate economic income arising from their investment. This brings them into the same position as someone who is above the minimum threshold and cannot defer their tax liability. Officials consider this to be a reasonable trade-off; while the schedule method approximates the gains on which an individual should be paying tax, the individual is able to defer the actual payment of tax for several years.
Recommendation
That the submission be declined.
Issue: Low-value FIF superannuation interest – exemption period should be available
Clause 213
Submission
(KPMG)
A person should be eligible for a four–year exemption period when calculating the amount of tax payable arising from their low-value FIF superannuation interest.
Comment
The foreign superannuation tax rules contain a four–year exemption period that is designed to mirror the transitional residence exemption for new migrants.
Under New Zealand’s domestic law, new migrants are provided with a four–year exemption on certain foreign-sourced income when they first become New Zealand–resident. The underlying intent is to provide new migrants with time to familiarise themselves with New Zealand’s tax rules and get their foreign investments in order. The transitional residence exemption is also available to returning New Zealanders if they have been non-resident for 10 years or more.
Under the foreign superannuation rules, all individuals receive an exemption period in relation to their foreign superannuation interests as long as they satisfy the requirement that they acquired the interest while they were non-resident. This is because in the context of foreign superannuation interests, an individual who is non-resident for nine years should not be treated materially different from someone who has been a non-resident for 10 years (or more).
However, officials do not consider it appropriate to extend the four–year exemption period to low-value FIF superannuation interests. As the bill also contains a proposal to allow individuals who were resident under domestic law but non-resident for the purposes of a double tax agreement to pay tax under the foreign superannuation rules, rather than the FIF rules, officials consider that the majority of individuals with low-value FIF superannuation interests will either have sufficient ties to New Zealand to remain New Zealand-tax resident while living overseas or will be living in New Zealand permanently when they invest into the foreign scheme. Providing these individuals with an exemption period would provide them with a tax exemption for four years’ worth of gains derived by their scheme. This would create significant equity concerns between the tax treatment of low-value FIF superannuation interests and other financial assets that a New Zealand resident may invest in (particularly at the same time), held both domestically and offshore.
Recommendation
That the submission be declined.