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Cross Boarder Tax Issues

Tax treatment of withdrawals from foreign superannuation schemes

People living and working overseas may contribute to a foreign superannuation (“super”) scheme. For example, New Zealanders who live and work overseas may be required to contribute to a work-related scheme. Non-residents migrating to New Zealand may also have foreign super scheme interests (whether work-related or private) which they continue to hold after becoming New Zealand tax resident.

The tax treatment of withdrawals and payments from foreign super schemes is a complex areas of tax law. The treatment often comes down to the specific facts, including the nature of the scheme and whether the superannuation interest was acquired while the person was resident or non-resident.

From a New Zealand tax perspective, it is important to get the classification of the foreign super scheme correct. If the foreign super scheme does not fall within one of the specified categories in the Income Tax Act 2007, a different set of tax rules may apply. Practically determining the exact nature of a super scheme can be difficult and will turn on documentation. However, Inland Revenue is of the view that most foreign employment-related retirement schemes that individuals contribute to while working overseas will be foreign super schemes (see Tax Information Bulletin Vol 26, No 4, May 2014, at 14).

Inland Revenue also provides its position on the United States Individual Retirement Accounts (“IRA”):

“Sometimes savings in an individual’s retirement scheme can be used for purposes unrelated to retirement. For example, in the United States, individuals are able to establish a retirement saving accounts known as an Individual Retirement Account (“IRA”). An IRA is a savings account set up for the exclusive benefit of the individual or the individual’s beneficiaries. To discourage the use of IRAs for the purposes other than retirement, a 10% penalty tax is imposed on any withdrawals made from the account before retirement. Some withdrawals can be made without penalty – for example, when withdrawals are made to meet higher education expenses, first home purchases or medical expenses, no penalty tax is imposed.

Nevertheless, IRAs are established mainly for the purposes of providing retirement benefits and therefore on the face of it, such accounts are likely to be foreign super schemes for New Zealand tax purposes”.

Once again, it is crucial to determine the exact nature of the scheme involved. In some instances, where the underlying investments are held directly by the individual, or are held on bare trust for the individual, the Foreign Investment Fund rules may apply. In other instances, the interest in the super scheme may be a financial arrangement subject to the Financial Arrangement rules.

Ismail Rasheed, the owner of IR Legal, is a specialist tax lawyer with 18 years’ experience.

Phone (04) 566 1155 | (09) 299 1155 | Email: office@irlegal.lawyer | www.irlegal.lawyer

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