Tax problem for New Zealand residents in Australia
New Zealand’s Foreign Investment Funds (FIF) legislation states that the ‘growth’ in the superannuation benefit of a New Zealand (NZ) resident in an Australian superannuation plan will form part of the person’s taxable income in NZ each year. ‘Growth’ means the increase in benefit that is not caused by contributions. For an accumulation fund therefore, the ‘growth’ is the investment return. The investment return earned in the Australian superannuation plan during the financial year (1 April to 31 March in NZ) should be declared on the person’s NZ tax return. No credit is given for any tax paid by the Australian superannuation plan (which would, in any event, be difficult to determine). The exemptions are:
New resident’s exemption. If an NZ resident joined an Australian superannuation plan before they became a resident of NZ for the first time, their benefit is exempt from the FIF regime for the rest of that year and the following three years.
De minimis exemption. If the aggregate member and company contributions paid to the Australian scheme while a NZ resident is less than A$20,000, the FIF rules do not apply.
Any NZ resident who joined an Australian superannuation plan while they were a NZ resident will be immediately caught by the FIF rules. An Australian resident who transferred to NZ and remained a member of an Australian plan for more than four NZ tax years will also be caught by the FIF rules. In both cases, individuals will effectively suffer double taxation on the growth in Australian superannuation benefits.
There is a special rule which applies to the portion of the ‘growth’ in the benefit that is attributable to superannuation accrued while the person was not a NZ resident. If part of the benefit accrued in an ‘employment-related foreign superannuation plan’ while a person was not a resident of NZ, then the ‘growth’ on that portion of the benefit is not taxable.
To qualify for this special treatment, foreign superannuation plans must meet the following:
- They must be of a kind where the benefit is acquired through employment.
- Contributions must have been made only by or on behalf of a person by the person, the employer or a former scheme.
- Benefits must not be assignable.
- Generally, the employee must be unable to withdraw from the plan before normal retirement age, or be subject to substantial loss for doing so.
Clearly, the first three conditions are satisfied by Australian superannuation schemes. The final condition is not so clear, as Australian superannuation schemes can pay out a non-preserved benefit before normal retirement age on change of employment. Of course, there is the ability to rollover the benefit in such cases, and hence perhaps the last condition is satisfied. Watson Wyatt is pursuing this matter.
If the situation was reversed, similar rules would not apply to an Australian resident accruing superannuation benefits in NZ. Australian FIF rules state that a taxpayer is exempt from the FIF provisions in relation to income earned in an employer sponsored superannuation plan and without any limits.
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