Baucher Consulting director and Tax Management NZ client Terry Baucher explains how tax pooling can help manage the tax liabilities of those looking to make withdrawals from foreign superannuation schemes or transfer FSS funds to a New Zealand superannuation scheme or KiwiSaver.
The start of the new tax year on 1 April, 2014 saw the introduction of revised rules regarding the taxation of withdrawals from foreign superannuation schemes (FSS) or the transfer of a FSS to a New Zealand superannuation or KiwiSaver scheme.
These new rules mean taxpayers will find the various Tax Management NZ (TMNZ) products excellent tools for managing their resulting tax liabilities.
From 1 April, most lump sum withdrawals or transfers to a New Zealand superannuation or KiwiSaver scheme will generally be taxed by reference to how long the holder of the FSS has been a tax resident in New Zealand.
Withdrawals/transfers within the first four years of tax residence will be exempt, but thereafter will usually be taxed under the ‘schedule method’. (A more complicated ‘formula method’ is also available in certain circumstances.)
Under the schedule method, the amount taxable begins at 4.76 percent and increases at the start of each tax year until the full amount of any withdrawal/transfer is taxable for anyone who has been resident in New Zealand for 26 years or more.
For example, Dan returned to New Zealand in June 2012, so his exemption period expires on 30 June, 2016. If he withdraws a lump sum of $50,000 from his FSS in January 2020, the relevant taxable fraction under the schedule method is 14.06 percent, as three tax years have started since 30 June, 2016. Accordingly, Dan should include $7030 as income ($50,000 multiplied by 14.06 percent) in his tax return for the year ended 31 March, 2020.
In addition to new rules for withdrawals and transfers made after 1 April, 2014, there are some transitional provisions relating to all withdrawals/transfers made between 1 January, 2000 (yes, that’s right), and 31 March, 2014, and which have not previously been returned as income.
In this situation, the withdrawal/transfer can be taxed under the confusing and complex rules which applied at the time of the transaction. Alternatively, the taxpayer can opt to include 15 percent of the amount in the person’s income tax return for either the year ended 31 March, 2014 or 31 March, 2015.
Working out the best option for transfers/withdrawals made before 31 March, 2014 involves some complicated calculations. Not only must the tax liability in respect of the transfer/withdrawal be determined, but the potential impact of Inland Revenue use of money interest (UOMI) and late payment penalties must also be considered.
Fortunately, this is where TMNZ’s various products come in handy.
Those taxpayers who have underpaid their tax for the year ended 31 March, 2013 or 31 March, 2014 can utilise Tax PURCHASE to minimise the interest and late payment penalties for those years.
If returning income from a transfer/withdrawal would result in a reassessment for years prior to 31 March, 2013, then Tax AUDIT is ideal.
Under the new rules, the amount taxable is likely to be significantly higher and for some taxpayers this may require making provisional tax payments when the funds are not immediately available.
This is an ideal situation to use Tax FINANCE, which enables a taxpayer to lock in a payment until funds are available, thereby minimising UOMI and late payment penalties.
The new FSS rules will affect several thousand taxpayers, many of whom will never have paid provisional tax beforehand.
Fortunately, the various TMNZ products will help mitigate those liabilities.
It’s another example of why I and many other tax practitioners consider TMNZ’s products as one of our key tools.