13 April 2011

Andy Crossen, an associate for chartered accountants Grant Thornton New Zealand, looks at tax issues affecting those with, or who previously had, UK based retirement savings

In 2006 the United Kingdom relaxed some of the rules regarding the migration of UK pension funds. The change allows most UK citizens who migrate to another country, including New Zealand, to transfer their UK pension funds to a Qualifying Recognised Overseas Pension Scheme (QROPS) in the country to which they have migrated. After a period of time, the taxpayer can access the funds without a penalty being imposed by the UK revenue authorities.

We understand from discussions with Inland Revenue that New Zealand has been the new home for approximately 300,000 migrants since the introduction of the New Zealand Foreign Investment Fund (FIF) regime in 1992.

The FIF rules tax overseas retirement funds in advance of the funds being distributed. The result is often harsh annual tax charges on the overseas superannuation assets both in terms of the overseas currency swing against the NZD and in terms of the value growth within the fund itself. The regime has strict compliance and notification rules and severe penalties for non-compliance. It is a productive audit ground for the New Zealand IRD.

In the past, many individuals holding UK based superannuation interests were in the fortunate position of being eligible for a number of exemptions from the FIF regime which are based on the taxpayer being prohibited from cashing up their foreign superannuation prior to reaching retirement age.

However, with the advent of the QROPS legislation in the UK, it is now possible in many cases for a New Zealand resident who has a UK pension scheme to cash it up. This ability to cash up the pension prior to reaching retirement age means that one of the New Zealand exemptions previously available before the UK QROPS changes in early 2006 is no longer available. The upshot of this is that the individual living in New Zealand is now likely to be subject to New Zealand tax in terms of their retirement funds.

It is important to note that the loss or otherwise of the New Zealand exemption is not dependent on whether there is actually a transfer to a New Zealand QROPS. The fact that such a transfer is possible is enough to remove the availability of the exemption.

The news is not all bad however, as in some cases an individual may have a loss in respect of their UK pension which in some income years can be used in New Zealand to offset other income such as salary. For example, the global financial crisis and the devaluation of the pound sterling against the New Zealand dollar over the past few years means that most United Kingdom pension assets will have suffered economic losses as calculated under the New Zealand rules.

At 1 April 2007 some major changes to the New Zealand rules were introduced These were mainly in relation to overseas shares and the introduction for the 5% fair dividend rate method. However, one important change for investors in overseas retirement funds was the relaxation of the rules which previously prevented losses being used to offset against other income. From 1 April 2007 to 31 March 2009 losses arising from overseas superannuation investments, as calculated under the comparative value (economic value change) method, could be offset against any other income. This ability to use losses was then removed with effect from 1 April 2009. However, the two-year window remains.

Taxpayers who hold interests in UK pensions that can be transferred to a New Zealand QROPS should realise that they are likely to be subject to the New Zealand regime from 6 April 2006 whether or not those interests are actually transferred. Accordingly, taxpayers should check to ensure that the conditions of any exemptions on which they relied prior to 1 April 2006 continue to apply to their circumstances.

Taxpayers who are concerned about this issue should contact their adviser to discuss their obligations and the possible tax refund upside through the loss of value that they have likely suffered during the period from 1 April 2007 to 31 March 2009.

This exposure to the New Zealand FIF regime may encourage those taxpayers to consider / reconsider moving those interests on shore into a New Zealand QROPS, to remove the New Zealand FIF exposure for years following the year of transfer. Anyone considering such action should seek independent financial planning advice well in advance of any decision.

ENDS

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