Migrants were shocked by Inland Revenue's plans to tax the growth of their retirement savings. Photo / Thinkstock
Inland Revenue has put on hold plans to tax the historic pension earnings of thousands of British citizens who migrated to this country.
The decision comes after those affected by IRD's interpretation of a 2006 law had been ringing tax advisers in tears at the prospect of tens of thousands of their retirement savings dollars being gobbled up in tax.
Tax adviser Terry Baucher said IRD's plans involved taxing the growth in pension funds transferred to this country. "The IRD was saying for people who transferred their pensions to New Zealand, in some circumstances the entire growth over the time they were contributing was taxable."
That meant people would effectively have had to pay a form of capital-gains tax on all the growth the fund had returned since they started making contributions, even if they had not been a resident of New Zealand for most of that time. "Even for someone who had been chipping in for 20 years prior to moving to New Zealand ... IRD were saying the entire growth was taxable."
IRD has now put the plans on hold, reviewing its interpretation of the law. Baucher expects to hear a result early in the new year.
An IRD spokesman said: "Ministers have agreed to review the current law with respect to foreign pensions and foreign pension schemes. This review creates an uncertainty as to what the law will be.
"At this stage, and on that basis, the Commissioner of Inland Revenue has determined that the current compliance activity in respect of foreign pensions/pension schemes should be put on hold until the outcome of the policy review becomes clearer."
UK pension schemes were not exempt from the Foreign Investment Fund (FIF) regime in New Zealand as of April 6, 2006, because from that date the UK made it easier to transfer UK pensions to a New Zealand scheme such as KiwiSaver. Once in a New Zealand scheme, the fund would be taxed like that of a New Zealand citizen's. But under current interpretations,, British savers would have been hit with a bill for the entire time they had been saving.
Baucher said it was alarming that the IRD took five years to identify the potential tax issues. "When we have a self-assessment system and the IRD is not providing guidance on areas like this, it's not good practice to put up red flags five years down the track.
"It's difficult to say how many people will be affected but there are significant numbers of pension transfers."
BAUCHER HAD one client who had £300,000 in growth in his account, which would have to be taxed at the rate that was relevant at the time, in this case 39 per cent.
"We've got people facing £50,000, £60,000 or £70,000 in tax charges and interest, plus, potentially, penalties.
"I have had people talk to me and they are horrified. Imagine if you make a transfer you think is capital and are told that New Zealand is going to tax all growth, even what you put in before even contemplating moving to New Zealand."
Baucher said other countries had a capital-gains tax system where people who migrated were deemed to have acquired the funds at the current market value at the time they became resident, and paid tax on growth from that point on.
The other change the IRD has announced is that people living in this country have to pay a fair dividend rate of 5 per cent on their foreign pension funds until they transfer their investment to a New Zealand fund, because overseas pension schemes are no longer exempt from the FIF.
The 5 per cent fair-dividend rate is calculated on the opening value of the fund and then tax at 33 or 39 per cent is paid on that amount.
The situation is different from a New Zealander's KiwiSaver account, because the KiwiSaver fund pays the tax on accounts out of the fund - the saver does not have to delve into their own pocket to cover it.
But UK pension-holders would have to finance the tax themselves, while being unable to access the account.
Martin Riley, of Sterling Tax Services, said the IRD needed to realise it was a big decision to transfer a pension from the UK.
He said in some cases it would be unwise for people to move their pensions - if they were in a final salary scheme guaranteed by the government with annual increases to match inflation, or if they were not sure their future was in New Zealand.
"It seems unfair that the taxpayers would be taxed on the growth in the fund when they realistically had no access to it."
Baucher said most of the 20,000 British migrants who arrived in New Zealand every year would be affected in some way.
"If someone has come here and has been contributing for 40 years, they might have £1 million in a scheme locked up and have to pay 5 per cent tax on that per annum, even if they are not drawing from it."
Tony Brokenshire, director of GB Pensions, said the message for migrants was that those thinking about transferring their pensions should do it during the transition of residence period, when it was tax neutral.