TAX TREATMENT OF FOREIGN SUPERANNUATION
The Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 addresses foreign superannuation schemes with the aim of making the rules simpler and easier to comply with.
Many people who have transferred foreign pensions to New Zealand, or who have the intention of transferring their foreign pensions to New Zealand, are unaware of their existing or previous tax obligations.
The IRD estimated that 70% of people who have transferred their foreign pensions to New Zealand, or who have made a withdrawal on their foreign pensions, are non-compliant because the old tax rules were complex.
Under the new rules, you may transfer your pension to NZ into an approved QROPS Scheme, and then pay tax based the number of years you have been in New Zealand (excluding your transitional residency period).
Your tax liability will start at 4.76% of the amount you are transferring, and will increase each year until you have been in New Zealand for 26 years or more, when it will be taxed 100%. For example, if you transferred $100,000 and you had been in New Zealand for only one year (excluding your transitional tax residency period) $4,760 of the amount transferred will be treated as taxable income during the year that you made your transfer. If your tax rate is 28%, then your tax liability will be $1,332.80. If, however, you defer transferring your pension for 26 years all of your funds will be taxed. The full $100,000 will be treated as taxable income, and your tax liability, assuming a 28% tax rate, will be $28,000.
The sooner you transfer your funds, the less your tax liability will be.
If you transfer your pension within your transitional tax period, you will not have a tax liability.
If you transferred your pension after 2007, you still may have a NZ IRD tax liability under FIF rules prior to transferring.
Alison Renfrew (UK Pension Transfer Specialist) has summarised various papers issued by the IRD on foreign superannuation rules. The summary was written in June 2013 and explains why the tax changes were made - click to download.
For additional information about transferring your pension or a discussion of potential tax liabilities, please book a free consultation here.