It has been highlighted in the media recently that IRD have been requesting information from NZ pension providers in respect of taxpayers who transferred their overseas pensions to NZ prior to 31 March 2014. We have also seen some IRD risk review letters asking how pension transfers have been treated for income tax purposes.

IRD appear to be mainly targeting transfers from UK pension schemes as these have been the most prevalent in recent years due to changes in the rules applying in the UK.

The NZ tax treatment of lump sum withdrawals and pension scheme transfers to NZ and Australian schemes changed with effect from 1 April 2014. Taxpayers now must now treat a percentage of the amount transferred as income using the ‘schedule method’. The percentage or schedule year fraction is determined by the number of years between the time the person became NZ resident and the date of the transfer or lump sum withdrawal. If the pension scheme is a defined contribution scheme, an alternative ‘formula method’ can be applied which effectively taxes the increase in the value of the interest since the person became NZ tax resident.

However, the focus of IRD attention is on transfers that occurred between 1 January 2000 and 31 March 2014, prior to the introduction of the new rules. Taxpayers who transferred their overseas pension schemes to NZ during that period are expected to have applied the tax laws that applied at the time of the transfer. In the vast majority of cases, the pension transfer would have been dealt with under the Foreign Investment Fund (FIF) rules. If the FIF rules didn’t apply at that time, whether due to the application of a FIF exemption or the de minimis exclusion, the appropriate tax treatment is unclear, and this uncertainty was one of the catalysts for the introduction of the new rules.

Taxpayers who did not apply the correct tax treatment to their historic pension transfers, have the option to pay tax on 15% of the amount transferred, provided they included the income in either their 2014 or 2015 tax return.

The 15% option is still available to those who have already filed their 2014 and 2015 returns, however the 2015 return will need to be reassessed and use of money interest (and in some cases late payment penalties) will apply in the usual way.

While the 15% option is preferred in a lot of cases, we have been able to improve on that by using the FIF rules in some of the situations we have reviewed. Please contact us to discuss if you have a UK pension scheme.