Pension changes afoot

Taxing Times is a weekly column that looks at various aspects of tax and money management.
Taxing Times is a weekly column that looks at various aspects of tax and money management.

In June, I discussed proposed changes to the way New Zealand taxes foreign pensions and said I would update readers when the law was enacted.

The Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill now awaits the final parliamentary stages before enactment. Although not technically law, the rules are unlikely to change in any material way.

Also, as the window to transfer foreign superannuation or withdraw lump sums and pay tax on only 15 per cent of the amount withdrawn is fast closing, I thought an update timely.

People with Australian superannuation schemes need not be too concerned as, generally, any lump sum or transfer from an Australian scheme is not taxable in New Zealand.

Existing rules for taxing interests in foreign superannuation schemes treat these as an interest in a foreign investment fund, or FIF. FIF rules impose tax annually based on the value of the superannuation interest. The problem was that not many people, other than tax geeks, knew what a FIF was, and even fewer complied with these rules. Those who did take advice may well have required a strong drink after leaving their accountant's office!

With the changes, New Zealand has returned to the more traditional approach employed by the rest of the world and will tax the income from the foreign pension only when it is received as a pension or a lump sum. However, a key departure from the original proposals limits the changes to people who acquired their foreign superannuation interest when not tax resident in New Zealand. This will mean some people will still be stuck with the FIF rules.

The main changes are:

The new rules apply from April 1, 2014.

After this time, people will only pay tax on their pension or lump sum on a cash receipts basis. Lump sum payments are taxable on a sliding scale basis that taxes more of the lump sum based on the time a person has been a tax resident here.

Lump sums from Australian schemes are generally tax free, as are pensions from Australia if they would have been exempt in Australia. For this reason, a transfer into an Australian scheme by a New Zealand resident is taxed as though it were a transfer to a New Zealand scheme.

A four-year exemption period for transfers and lump sums is available for all people from the time they became a New Zealand tax resident. This means people migrating here have four years to transfer their superannuation tax free.

People who had not previously complied with the FIF rules and received a lump sum amount or transfer before April 1, 2014, have the option to pay tax on only 15 per cent of the lump-sum amount. This is important - if you are pondering a transfer of foreign superannuation it may pay to consider doing it before March 31, 2014. However, always get advice on this.

As a transitional measure, if you returned income under the FIF rules when the bill was introduced you can elect to continue on this basis.

The tricky stuff with these new rules is the transition, and whether advantage should be taken of the 15 per cent concession for scheme transfers and lump sums. If considering a scheme transfer or lump sum withdrawal, I recommend a visit to your tax adviser before making final decisions.

Craig Macalister is tax principal at accounting firm Crowe Horwath. Phone (03) 211 3355.

The Southland Times