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Many migrants to New Zealand have interests in foreign superannuation funds or are entitled to receive regular pensions from these funds. How and when these funds are taxed can be confusing as there are a number of tax rules that could apply. It is also not uncommon for migrants who have been resident in New Zealand for many years to be unaware that they had a New Zealand tax obligation in respect of these funds.
We summarise below some of the tax issues that need to be considered:
Foreign superannuation funds are generally not taxable in New Zealand while the migrant is a transitional resident.
Broadly, the transitional resident exemption applies for a period of at least 4 years from the time the person becomes tax resident in New Zealand if:
The transitional resident period therefore represents an opportunity for new arrivals to understand what their tax obligations will be in respect of their foreign superannuation funds once they cease to be a transitional resident and to consider what their options are prior to the end of the exemption period.
The confusion with foreign superannuation funds is often around determining which New Zealand tax rules apply to the fund. Depending on the individual’s specific situation, it will either be the Foreign Superannuation Scheme rules, the Foreign Investment Fund rules, or the general Pension Income rules that will apply to the fund.
Once an individual becomes tax resident in New Zealand (or the transitional residency exemption period has ended), it is then necessary to consider whether the fund is from a country with which New Zealand has a Double Tax Agreement (DTA).
If the fund is in a DTA country, the DTA typically provides guidance on how the person is taxed in respect of distributions (i.e. pension or annuity payments) from the fund, and whether foreign tax credits can be claimed if tax was deducted in the overseas country.
Or, if the fund is not in a DTA country, generally pension and annuity payments are taxable in New Zealand at the individual’s marginal tax rate. If the pension or annuity payment was taxed in the overseas country, often a foreign tax credit can be claimed in New Zealand to offset the New Zealand tax payable.
If a lump sum is withdrawn from the fund, or the fund is cashed in or transferred to New Zealand (or Australia) the amounts received are also taxable. There are two calculation methods which can be used, depending on the type of fund, with the default method taxing a portion of the lump sum or transfer based on the number of years that the individual has been tax resident in New Zealand.
In certain circumstances, the fund could be subject to the Foreign Investment Fund which then requires the individual to apply a variety of methods to calculate the annual deemed income from the fund, notwithstanding that no distribution may have been received.
Individuals who also qualify for New Zealand Super should consider whether the receipt of a foreign pension will impact on the amount of New Zealand Super that they will receive.
Sometimes payments of foreign pensions or annuities are also taxed in the overseas country at the time the payment is made. If the DTA specifies that the payment is only taxable in New Zealand, no foreign tax credit can be claimed in New Zealand and the individual is taxed on the gross amount in New Zealand. The individual should advise the fund to stop deducting tax and should look to obtain a refund of the overseas tax from the overseas tax authority. In some situations, such as the United Kingdom, Inland Revenue can assist with this process.
If you are a transitional resident with an interest in a foreign superannuation fund and are unaware of what your New Zealand tax obligations will be once your exemption period ends, please get in touch with a Nexia advisor to discuss your tax obligations.
If you are not a transitional resident and have an interest in a foreign superannuation fund, or receive overseas pensions or annuities, and you are not currently accounting for these in your New Zealand tax return, please get in touch with a Nexia advisor to discuss your tax obligations.
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Nexia New Zealand has four offices throughout New Zealand: Victoria Street in Christchurch, Albany on Auckland’s North Shore, Newmarket in the Auckland CBD and Hastings in Hawke’s Bay.
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