Foreign super scheme amnesty

Under the FIF rules, savings accumulating in a foreign super scheme are taxed on an annual basis. Photo / Thinkstock

An amnesty forms part of Government plans to overhaul the tax treatment of foreign superannuation schemes.

The existing regime is complex and riddled with inconsistencies, giving rise, the Inland Revenue believes, to widespread non-compliance.

In many cases people with an interest in foreign superannuation schemes should be, but are not, paying tax on an accrual basis under the foreign investment fund (FIF) regime.

Under the FIF rules, savings accumulating in a foreign super scheme are taxed on an annual basis generally, but not necessarily, based on a deemed 5 per cent a year return.

Under the proposed overhaul, interests in foreign super funds would be removed from the FIF regime.

Instead, lump sum withdrawals or transfers would be taxable, at the taxpayer's marginal rate, on receipt and usually only in part.

Under the proposed "inclusion rate" approach, a sliding scale based on how many years someone has been resident in New Zealand would determine how much of the payment was caught in the tax net, from zero in the first two years to 100 per cent only after 25 years residence in this country.

Exemptions for transitional residence, and in relation to Australian schemes, will also remain unchanged.

Those who have not been complying with the existing regime, if they come forward before April 2014, will be taxed at 15 per cent and forgiven normal penalties and interest changes.

Deloitte tax partner Patrick McCalman said the existing rules were so complex that by and large people did not comply.

But the amnesty was unusually generous in that it not only let the interest and penalties go, but potentially let people pay less tax than they would have, had they complied.

The moral hazard in that approach is compounded by the fact that it locks compliant taxpayers into the existing FIF regime, under which savings are taxed on an accrual basis as they accumulate but are tax-free whenpaid out, mirroring the taxed-taxed-exempt treatment of local superannuation.

"Taxpayers who have historically complied, for example by applying the FIF rules ... may feel that those non-complying taxpayers are better-off," McCalman said.

"At the very least, we would suggest that compliant taxpayers should have the same option as non-complying taxpayers, to follow Inland Revenue's proposed 'inclusion rate' approach, where tax would only be payable when the income is received."