Diana Clement 's Opinion

Your Money and careers writer for the NZ Herald

Diana Clement: Taxman lines up king hit on overseas pensions

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IRD found that 70 per cent of a sample of 869 people who had transferred their pension here had evaded tax

Got an overseas pension? New tax rules could hit your nest egg. Photo / Thinkstock
Got an overseas pension? New tax rules could hit your nest egg. Photo / Thinkstock

Hundreds of thousands of Kiwis are up for a tax king hit. And many of them have no idea it's coming.

Readers with overseas superannuation and pensions in countries other than Australia could be hit with tax at their marginal rate on up to 100 per cent of the value of the pension thanks to new tax rules.

An amnesty has been declared until April 1 next year, but many of the people affected have no idea that the rules exist.

The Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill is changing the way people with overseas pensions and superannuation are taxed. It will affect those people who hold overseas pensions or have transferred their pensions here since 2000.

It's estimated hundreds of thousands of people have private foreign pensions from the UK, Ireland, United States, South Africa and Germany. Many have been evading tax - wittingly or unwittingly.

The Inland Revenue Department found that 70 per cent of a sample of 869 people who had transferred their pension to New Zealand had evaded tax. That is in part because very few people - including accountants - understood the old system.

Pension transfer companies are urging those with UK pensions that can be transferred here to do so before April 1.

The issue for the IRD is that overseas pensions often grow tax-free, whereas KiwiSaver is taxed every year until retirement. The tax man's argument is that New Zealand residents who hold these overseas pensions are at an unfair advantage over Kiwis who are paying into KiwiSaver.

Under the old FIF (foreign investment fund) rules that were ignored by the majority of people, New Zealand residents who held overseas pensions paid tax annually on the capital gains of the fund. The new rules will see people taxed only when they transfer money out of their UK pension as a lump sum or regular distribution.

The amount of tax will depend on how long each individual has been resident in New Zealand. In the first four years there should be no tax. The percentage of the capital that is taxed then increases each year. After a total of 25 years in New Zealand backdated to the year 2000, UK pension-holders resident here will owe tax at their marginal rate on 100 per cent of all withdrawals. That could mean paying 33 per cent of their entire overseas pension to the New Zealand tax man.

There is an alternative for people who want to calculate the exact gains and pay tax on those. However, the cost of the accounting work to do this could outweigh the benefit.

The Government has offered an amnesty for anyone who transfers their pension here before April 1. Those people, and others who have already transferred since 2000 and not paid the correct tax, will only be taxed on 15 per cent of the capital at their marginal rate.

The new rules have drawn criticism from some quarters. Tax adviser Terry Baucher of Baucher Consulting, who made submissions on the bill, describes the new rules as "disgraceful" and a "tax grab".

He says that if the IRD taxes 100 per cent of someone's overseas pension, it was taxing the original invested capital, not just the income that would have been taxed had the money been invested in KiwiSaver instead of overseas. "That is a capital transfer tax, not a tax on deferred income or capital gains."

Greg Thompson, head of the taxation and accounting division at Grant Thornton, said most accountants were happy that there was now a simpler system for taxing foreign pensions. He said, however, that there was a "fundamental concern about whether (New Zealand) should be taxing the underlying pension contributions" as the new system does.

The new tax does not apply to Australian Superannuation. Baucher said that this was unfair. Why should one sibling who goes to Australia and contributes to Super and another who goes to the UK and contributes an equal amount to a pension there be taxed differently, he asks.

The rule changes are a bonus to pension-transfer companies, which take a cut of up to 5 per cent of people's UK pensions when they are transferred here. Many people will feel that they must transfer their pensions here to avoid what they see as a draconian tax.

Pension-transfer companies such as Britannia make 2-5 per cent of the amount transferred to New Zealand so a rush in transfers is good business.

That, however, might be the tax tail wagging the dog, says Jocelyn Weatherall. Transfers aren't suitable for everyone. "People might say, 'look at all the tax'. But it might not be the right thing to bring the money over here." The wrong decision made now could have a huge impact on retirement income.

It may not even be possible within the time frame for more complex cases, such as people who have defined benefit pensions, to be able to complete the transaction. Many countries don't allow private pensions to be transferred here.

One of the big problems says Weatherall, is that the rules are proposed, rather than in law, but if they pass through in the current form pension-holders will not have adequate time to make a decision.

UK pension money can only be transferred into approved managed funds, called QROPS (qualifying recognised overseas pensions schemes), or KiwiSaver. Some KiwiSaver funds are QROPS-approved, but there are also non-KiwiSaver QROPS.

Pension transfers are strewn with gotchas, whether people transfer the money or leave it where it is.

One is currency. Many UK pension holders didn't move money here because they were hoping for the dollar/pound exchange rate to move in their favour. It's unlikely to happen in the near future, says Derek Rankin of Rankin Treasury. Over the next 12 to 18 months the exchange rate is likely to move sideways, he says, and then the New Zealand dollar may strengthen further.

Pensions can be transferred into a small number of sterling-denominated superannuation funds here rather than a New Zealand dollar-denominated fund, says Simon Swallow of pension transfer company Charter Square Services.

Transferring the money into a complying KiwiSaver fund isn't always a good idea because of UK rules about what can be done with that money, says Swallow. It all but stops people from making first-home withdrawals from KiwiSaver, applying for hardship withdrawals, or withdrawing the money if they leave New Zealand permanently. These can all be done, but are subject to a 55 per cent tax from the UK.

On the other hand non-KiwiSaver QROPS funds don't have the same range of investment options open to KiwiSavers and usually have higher ongoing fees.

Anyone transferring their money to New Zealand needs to be totally sure they won't return to their country of origin. That's not always possible, says Baucher. Sometimes life changes in unexpected ways, such as a parent becoming ill or frail.

Some people may be tempted to ignore the new rules. That would be risky, says Weatherall, who expects the IRD to go looking for evaders once the amnesty is up. The easiest people to catch will be those who have already transferred their pensions here, but have not paid the backdated tax. "All the IRD has to do is write to the QROPS providers and ask for a list of names."

Some people simply don't realise they have tax to pay, says Weatherall. "It's quite left-field and it is happening quickly." They think because they are not receiving their pension that they are not liable for tax here. "They could be in for a nasty surprise."

One of the big problems, says Swallow, is how people pay the tax if they are not actually getting cash in hand with the pension transfer. The KiwiSaver rules are being changed so that they can withdraw money from KiwiSaver for tax or the taxpayer could withdraw money from their QROPs superannuation scheme. But this then triggers a 55 per cent tax to be paid to the UK on the money.

People who had been declaring their pensions under the FIF rules can continue to do so and might be better off than using the new rules.

- NZ Herald

Diana Clement

Your Money and careers writer for the NZ Herald

Diana Clement is a freelance journalist who writes about personal finance and careers. She has worked as a journalist for more than 25 years in both New Zealand and the UK. Diana has contributed to a large number of local and international publications. Her pet topic is the secrets of saving money.

Read more by Diana Clement

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