NEW RULES IN RELATION TO OFFSHORE SUPERANNUATION SCHEMES
One of the most complex areas of New Zealand tax law is the international tax rules that apply to New Zealand residents whom have offshore investments in super schemes. Often this arises in a context of a new migrant or returning expat taking up tax residency in New Zealand and retaining an interest in a foreign super scheme. As discussed elsewhere on this site if the new or returning migrant falls within the transitional residency rules then there is a 48 month window when income from the offshore investment can be kept out of the New Zealand tax net. In the absence of this though the rules are very complex.
At the time of writing (September 2012) the New Zealand law in relation to most offshore equity investments are the Foreign Investment Fund (FIF) rules. The FIF rules seek to deem a certain amount of taxable income based on various calculation methods. The most common calculation method is the fair dividend rate method which deems there to be taxable income of 5% of the opening market value of the offshore investment. If the fair dividend rate method cannot be utilised there are various other calculations that can be applied. Overall the FIF rules are complex and often ignored either due to their complexity or because people are simply not aware of them.
Conscious of this, the Government has proposed new rules to deal with interests in foreign super schemes. The intention is to tax distributions and transfers when they occur rather than force taxpayers to apply complicated rules to deem income on an annual basis. These rules are proposed as at the time of writing (September 2012), but intended to apply retrospectively to payments from super funds from 1 April 2011. Broadly speaking the rules will treat a certain proportion of distributions from foreign super schemes as taxable. The proportion which is taxable will be based on the length of time that the recipient has been in New Zealand. The longer that they have been in New Zealand the greater the proportion that is taxable. This is known as the inclusion rate approach.