A few weeks ago, we talked about the amendments to the platform economy rules contained in the Taxation (annual Rates for 2024-25, Emergency Response, and Remedial Measures) Bill. Another change contained in this bill relates to foreign superannuation funds.
Foreign superannuation funds are taxed under a special regime where they are not subject to New Zealand tax until they are withdrawn. Under the default rules, when an amount is withdrawn, a percentage of the withdrawn amount is taxed at a person’s marginal rate depending on how long they have been in New Zealand for.
This often leads to a discussion around whether it is better to take the funds out early, potential reducing New Zealand tax but possible incurring penalties with the fund or wait to maturity.
Some foreign funds allowed a transfer to KiwiSaver or similar to occur without penalty. This looked attractive until you considered some New Zealand tax might still be payable, and all the withdrawn funds would be locked in KiwiSaver meaning you would need to pay the tax from other money. The Bill introduces a new regime where instead of paying this tax in your personal name, the fund can pay the tax (out of your investments). This has two advantages. There is no additional cashout flow from your other money and the tax rate is a flat 28%.
The ability to pay the tax from the transferred funds will be a bonus for people looking to transfer funds to KiwiSaver but concerns arose around finding free cash to pay the tax. It may also change the thinking for some people planning to leave funds to maturity. Transferring the funds early and paying tax at a flat-rate of 28% may now look more attractive where the amount of the funds might have resulted in a 39% marginal rate if simply withdrawn to personal names.