Advisers stunned by pension transfer ‘tax grab’

Advisers have been caught on the hop by the Inland Revenue’s new stance on pension transfers, which could leave some of their clients facing six-figure tax bills.

Friday, July 27th 2012, 7:02AM 3 Comments

by Niko Kloeten

Until recently it’s been thought that UK superannuation fund transfers aren’t taxable, but the IRD has put out a proposal that would see a certain percentage of each transfer treated as income based on a sliding scale of how long the owner of the funds had lived in New Zealand.

Those who transfer their funds across within four years of migrating to New Zealand would pay no tax, while those who have lived in the country more than 25 years at the time of transfer face having 33% of their money taken by the IRD, which would treat 100% of the transfer as income.

The IRD has offered two options for those potentially affected: apply the rules that existed in previous years, or; voluntarily pay tax on 15% of the transferred amount.

Leech & Partners tax adviser Chris Heffernan described the tax situation around previous transfers as “confused” and said there is little guidance from the IRD on the issue.

“The IRD have indicated that they think many people have not complied with the tax rules before now, but I am not entirely convinced that the IRD are certain what those tax rules are, or were.”

Heffernan described the move as a “tax grab” and said there was potential for a “flight of capital from New Zealand” as a result.

“If you’ve got a $1 million pension fund and don’t take advice, you could be faced with a tax bill of up to $330,000 if you bring it over here.”

However, Britannia Financial Services adviser David Milner said the proposal seemed "pretty damn fair" and would create a "level playing field" between those who had left their money in pension funds in the UK and those who had moved their money here.

"You've got people getting gains tax-free while people in similar regimes in New Zealand having been paying tax on their PIEs," he said.

Milner said the big questions would be over the formula and the question of how the tax is actually paid: for large amounts the tax would have to be paid from the funds themselves.

The IRD has called for submissions, which are due by September 30.

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 28 July 2012 at 12:33 am Dean said:

This is such a minefield, particularly given that the contributions to such schemes may have been tax deductible to the contributor at the time the contribution was made, with tax to be paid only when funds (and any untaxed investment income) were withdrawn, generally in instalments after retirement.
I fail to see why length of residency in NZ has any bearing on the taxability of the funds in question.
Tax fairness ("what's that?" I hear you ask) would mean that if funds are derived from tax deductible contributions, then tax should be applied when the funds are received by the taxpayer, regardless of how long they have lived in NZ.
Having said that, it seems unfair to treat the full transfer as income in one year, given that most of us would have expected to spread the funds over many years after retirement.

On 30 July 2012 at 10:09 am A H Wills said:

You don't mention that the 15% option only applies to people who transferred their funds between 1 Jan 2000 and 31 March 2011. Anyone who did it in the 2012 tax year will be hit with the full %.
Also, to take the option to continue to apply the FIF rules, you must have already have been doing it prior to March 2012, i.e it is too late to choose that option now.

On 1 August 2012 at 10:33 am Chris Heffernan said:

It's fair going forward to know what the rules, options and consequences are, but not fair to impose it retrospectively. The 'amnesty tax' is a tax grab as I firmly believe that the IRD did not think (or say) that UK pension funds were taxable.

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