Time for action on foreign pension tax

The rules have changed on foreign pensions paid to New Zealand recipients.
The rules have changed on foreign pensions paid to New Zealand recipients.

The taxation of foreign pensions in New Zealand is an issue that seems to be constantly coming to our attention, writes Craig Macalister in Taxing Times.

We have previously discussed proposals put forward by the Government for changes to the way immigrants and returning New Zealanders' pensions are taxed, including lump-sum payments and transfers into New Zealand schemes. These proposals are still under consideration by Government. We have also discussed progress on the superannuation arrangement between New Zealand and Australia to allow superannuation savings in KiwiSaver and the Australian equivalent schemes to be transported across the Tasman.

However, on top of all of this, another issue has come to the fore that will give people in receipt of foreign pensions more immediate things to think about. While the pensions concerned are mainly employment-related or private (non-government) British pensions, pensions from many other jurisdictions are affected also. For the purposes of today's article, I will refer to British pensions to illustrate.

The nub of the issue relates to whether a tax credit can be claimed in New Zealand for tax paid in Britain.

Many people just naturally assume that you can claim a foreign tax credit for the British tax deducted against New Zealand tax payable on the foreign pension income. Indeed, so does Inland Revenue's call centre staff.

However, while it is not uncommon for Inland Revenue to have different views among different areas, the prevailing position within Inland Revenue is that you cannot claim a foreign tax credit for British tax paid on a non-government pension.

The issue is best explained by a simple scenario.

Maisie decides to immigrate to New Zealand to retire. She is in receipt of a pension from her former British employer, receiving about £18,000 a year, from which tax of about £3500 has been deducted and paid in Britain.

Each year, Maisie has returned the pension in New Zealand dollars in her New Zealand IR3 tax return and claimed a credit for the British tax paid. As above, Inland Revenue's view is that Maisie is not entitled to claim this tax credit.

The reason for Inland Revenue's view stems from the fact that the United Kingdom revenue authority, HM Revenue and Customs, signed away their rights to tax this income under the double tax agreement between New Zealand and the United Kingdom.

As I said, this is not limited to British pensions. Pensions from other countries could be affected also. However, for former residents of Britain living in New Zealand, this means that Britain should not be deducting tax from their pension.

Inland Revenue New Zealand has only just woken up to the fact that many people in receipt of British pensions have been incorrectly claiming foreign tax credits.

Here's the tricky bit. Inland Revenue wants the tax on the foreign pension income.

The good news is that Revenue and Customs will refund the foreign tax deducted from the pension. The bad news - other than all the paperwork that needs to be completed by people affected - is that there may be a tax shortfall in New Zealand. On the other hand, the tax refund from Britain could exceed any New Zealand tax shortfall - this depends on people's individual circumstances.

So what to do? Unfortunately, as Inland Revenue is in receipt of pension data from Revenue and Customs, doing nothing may eventually catch up. We are aware of some people who have had letters from Inland Revenue about this. My advice is to speak to a tax adviser about the options available. It may be that with a little tax advice some people may feel up to tackling this themselves. Certainly our firm is happy to give some pointers in this regard.

Finally, without wanting to be a doom merchant, I do note that this issue is raising its head with pensions from countries other than just Britain. Immigrants from other countries, such as South Africa and some European countries, who are in receipt of private (non-government) pensions may discover they too have a similar issue. Again, a tax adviser will be able to let people know if their foreign pension is affected.

» Craig Macalister is tax principal at accounting firm WHK. He can be contacted on 03 211 3355.

The Southland Times