Idea Transcript
KPMG Centre 10 Customhouse Quay P.O. Box 996 Wellington New Zealand
Chair Finance and Expenditure Committee Parliament Buildings Wellington
Telephone +64 (4) 816 4500 Fax +64 (4) 816 4600 Internet www.kpmg.com/nz
Our ref
KPMG supplementary submission (130819)
19 August 2013
Dear Sir
Additional information on foreign superannuation scheme tax changes - Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill KPMG was asked to provide further information on the types of foreign superannuation schemes that may not qualify for the proposed amnesty under the foreign superannuation scheme tax changes in the above Taxation Bill. Focus of the issue Our concern is that the proposed amnesty only appears to be applicable if past withdrawals from a foreign superannuation scheme should have been taxable, but no tax was paid on the lump sum received. This will not be the case if the foreign superannuation scheme is an attributing interest in a Foreign Investment Fund (“FIF”), as defined in the Income Tax Act 2007, for the reasons outlined in the attached Appendix. There is, therefore, the need to determine which schemes are likely to be FIFs and those that will be exempt from the FIF taxation regime (and eligible for the amnesty). Types of schemes Our focus is on the particular exemption, from the FIF rules, for foreign employment-related superannuation schemes. This is called the “New Resident’s Accrued Superannuation Entitlement Exemption”. (The various FIF exemptions are also outlined in the Appendix.) The New Resident’s Accrued Superannuation Entitlement Exemption applies to superannuation schemes which have restrictions on the nature and quantum of contributions to the scheme, and access to benefits (i.e. funds are locked-in until normal retirement age or only accessible at the cost of a substantial decrease in the present value of the benefits under the scheme). In our experience, this FIF exemption does not apply or there is uncertainty about the tax position due to: •
Voluntary contributions – these may breach the requirement that employee (and employer) contributions must bear a fixed relationship to the person’s employment income.
•
Ability to withdraw or transfer benefits on leaving an employer (thereby breaching the stringent lock-in requirements of the exemption).
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Finance and Expenditure Committee Additional information on foreign superannuation scheme tax changes - Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill 19 August 2013
•
Whether “normal retirement age” is 65 (i.e. New Zealand’s retirement age), or a lower age based on practice in the country in question. Commonly, foreign funds allow withdrawal at or from age 50 or 55.
•
Whether the imposition of additional tax or penalties (e.g. to claw back of any tax preference on contributions, for example) constitute a “substantial decrease in the present value of the benefits” under the scheme.
We have covered some of the key countries where foreign superannuation interests are likely to be based in the following table. The table has been prepared based on our experience in considering these schemes. However, foreign superannuation regulations can be complex. The application of the New Zealand FIF rules is specific to the facts and circumstances of the taxpayer, and scheme in question. Therefore, this table is only provided for indicative purposes. The table, as well as indications whether each type of scheme is likely to be a FIF interest or not, includes comment on the relevant features of the scheme.
Country
Type and features of schemes
Likely New Zealand tax treatment
Australia
Employer superannuation arrangements – are Government supported/regulated and encouraged (including through the Australian tax system – e.g. tax concessions on contributions and a 15% tax rate on earnings of Australian superannuation funds). Employers are required to pay a percentage of an employee’s salary (9.25% from 1 July 2013) into a designated superannuation fund.
Likely to be exempt – as we understand most Australian superannuation interests should meet the definition of “Australian Regulated Superannuation Scheme” (refer Appendix).
United Kingdom
Occupational pension schemes – these can be either:
Likely to be a FIF – if a person can transfer out of their UK scheme to a scheme registered by the UK HMRC as a Qualifying Recognised Overseas Pension Scheme (QROPS). A QROPS transfer should also not trigger any adverse UK tax consequences (i.e. no reduction in the present value of benefits).
•
Defined benefit schemes – where the employee is entitled to a pension of a fixed portion of their salary in the period leading up to retirement; or
•
Defined contribution schemes – where the employer (and sometimes also the employee) makes regular payments, typically a percentage of salary, into a pension fund, and the fund is used to buy a pension when the employee retires.
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Finance and Expenditure Committee Additional information on foreign superannuation scheme tax changes - Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill 19 August 2013
United States
401(k)s – are defined contribution superannuation schemes under the US Internal Revenue Code. Contributions are deducted by employers from employees’ salaries (in some cases there may be matching employer contributions). The contributions can be on a pre or post tax basis and can include additional voluntary contributions. There are restrictions on withdrawals of contributions, generally until the age of 59 ½ (with limited exceptions). Permitted withdrawals may be subject to a 10% tax.
Likely to be a FIF – as we understand employees can make additional voluntary contributions, withdrawals from 401(k)s are permitted in certain circumstances and the 10% tax “penalty” on early withdrawal may not qualify as a significant reduction in the present value of benefits received.
Canada
Registered Retirement Savings Plans (RRSPs) – these allow contributions to be made into tax-preferred savings schemes. (Due to the tax preferences, i.e. deferral of tax on contributions until withdrawal and no tax on earnings in the scheme, we understand RRSPs must comply with strict conditions stipulated in the Canadian Income Tax Act.) We also understand that a person can withdraw funds from some RRSPs at any time and can also access funds for housing and educational purposes.
Likely to be a FIF – as we understand that some RRSPs have no lock-in restrictions and any deferred tax on contributions, crystallised on withdrawal, may not qualify as a significant reduction in the present value of benefits received.
Singapore
Central Provident Fund (CPF) – Government managed superannuation arrangements for working Singapore Permanent Residents (“PRs”) and citizens. Compulsory employer and employee contributions. We understand funds are generally locked-in until age 55.
Likely to be a FIF – as we understand funds can be accessed on ceasing to be a Singapore PR or citizen and leaving Singapore permanently (or to purchase a home under the CPF Housing Scheme).
Malaysia
Employees Provident Fund (EPF) – compulsory Government savings plan for private sector workers in Malaysia (we understand this is mandatory for Malaysian citizens and voluntary for non-Malaysian citizens). Compulsory employer and employee contributions. We understand funds are locked-in until age 50 (with full access to funds at age 55).
Likely to be a FIF – as we understand funds are accessible on permanently leaving Malaysia (or for certain other specified purposes, such as housing).
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Finance and Expenditure Committee Additional information on foreign superannuation scheme tax changes - Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill 19 August 2013
Conclusion Based on the above, and our experience in practice with these issues, we believe that a significant percentage of foreign superannuation scheme holdings are likely to be attributing interests in a FIF and therefore ineligible for the proposed amnesty. We therefore reiterate the recommendation in our main submission (at pages 4 and 5): ... that the proposed “15 percent amnesty” be extended to foreign superannuation scheme interests that are FIFs. That is, the FIF rules should also be turned off, for the period from 1 January 2000 to 31 March 2014, for such interests (similar to new section CZ 21B(5) in clause 25 of the Bill which will override the current rules for taxing withdrawals.) If there have been any withdrawals during the amnesty period, and FIF income has not been previously returned, 15% of the withdrawals should be taxable. If there have been no withdrawals, the new rules will appropriately tax the foreign superannuation interest when the savings are repatriated to New Zealand on or after 1 April 2014.
Further information Please do not hesitate to contact us if you require any further information on this supplementary submission. Yours sincerely
John Cantin Partner
KPMG supplementary submission (130819)final.docx
Darshana Elwela National Tax Director
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Finance and Expenditure Committee Additional information on foreign superannuation scheme tax changes - Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill 19 August 2013
Appendix Current (and previous) taxation rules for foreign superannuation schemes All foreign superannuation schemes are, prima facie, FIFs, for tax purposes. Special rules apply to tax income from FIFs. Under the FIF rules that apply from 1 April 2007, a foreign superannuation scheme interest is generally taxable on deemed income equal to 5% of the yearly opening market value of the interest under the Fair Dividend Rate (“FDR”) method (or a cost based variant if market values are not available). Prior to 1 April 2007, such interests were generally taxable on both the realised and unrealised change in value under the Comparative Value (“CV”) method. Under both the current and previous FIF rules, distributions from an attributing interest in a FIF are not (and were not) taxable outside of the FIF income calculation. This includes both lump sum and pension benefits. Therefore, based on our reading of the draft legislation, the proposed amnesty will not be applicable to holders of foreign superannuation schemes that should have been taxed under the FIF regime, rather than on withdrawal, as past distributions from these schemes would not have been taxable.
Foreign superannuation schemes that are exempt from the FIF rules The proposed amnesty will only be applicable to those foreign superannuation schemes that are exempt from the FIF rules. These exemptions are: 1. Exemption for Australian Regulated Superannuation Savings: Schemes that are “Australian Regulated Superannuation Schemes”. There are four types of qualifying Australian schemes: (i)
Approved Deposit Funds (as defined in section 10 of the Superannuation Industry (Superannuation) Act 1994 (Aust))
(ii)
Exempt Public Sector Superannuation Schemes (as defined in section 10 of the Superannuation Industry (Superannuation) Act 1994 (Aust))
(iii)
Regulated Superannuation Funds (as defined in section 19 of the Superannuation Industry (Supervision) Act 1993 (Aust))
(iv)
Retirement Savings Accounts (as defined in section 8 of the Retirement Savings Accounts Act 1997 (Aust))
2. New Resident’s Accrued Superannuation Entitlement Exemption: Schemes acquired by a person when they were not New Zealand resident (or within 4 years of becoming resident), where: (i)
The rights to participate in the scheme were acquired through employment or selfemployment; AND
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Finance and Expenditure Committee Additional information on foreign superannuation scheme tax changes - Taxation (Annual Rates, Foreign Superannuation and Remedial Matters) Bill 19 August 2013
(ii)
The contributions to, or benefit from, the scheme must be calculated by some “fixed relationship to the person’s income” and are linked to income from that employment; AND
(iii)
The only contributions are made by the person or their employer; AND
(iv)
There are restrictions on accessing benefits under the scheme until “normal retirement age” – i.e. funds are generally locked-in or cannot be accessed without incurring a significant reduction in the present value of the benefits.
3. FIF income deemed not to arise: Where the total cost of acquiring the foreign superannuation interest (along with the cost of acquiring all other FIFs, including foreign shares) is NZ$50,000 or less. 4. Non-resident’s Pension or Annuity Exemption: Foreign pension or annuity rights acquired when the person was not a New Zealand resident (or within 4 years of becoming resident) with restrictions on access to benefits (e.g. the funds cannot be accessed without incurring a significant reduction in the present value of the benefits).
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