By Simon Swallow*
Much has been made recently of people getting tax notices from the Inland Revenue for pensions that they had transferred to New Zealand.
Should everyone be crying for people that have received tax bills?
Should everyone be worried about the Inland Revenue chasing more people for tax?
Or should we all just bury our heads in the sand and hope that the problem will disappear?
There are lots of thorny issues floating around these questions. Many of which have been raised in recent press articles - Like, should financial advisers have given tax advice on pension transfers? And what ways can people pay the tax bills the Inland Revenue are sending?
To understand the answers you have to understand the history
The history of pension transfers in New Zealand can be split into two periods: before the 1 April 2014 tax changes, and; after the tax changes. The infographic below attempts to simply and in general terms capture the state of the nation in each of these periods.
In a nutshell, before the changes anyone with a UK pension had to notify the Inland Revenue of it and pay tax on the gain in value every year. So there is no confusion this was for any pension regardless of whether or not it was in payment.
So if Cheryl had an NHS pension, for example, every year she would have written to the NHS and asked them to send a valuation of her plan. She would then work out how much it had gone up by and put that value as income in her tax return. Even though she could not access that pension she had a yearly tax liability on it.
Because Cheryl, and many like her, never thought that having a pension not in payment would lead to a tax liability they never returned anything in their tax return. The Inland Revenue woke up to this and realised that the current system was not working. They thought that they would introduce a new system that got rid of this yearly requirement and simplified everything.
The new system would only tax when a payment was made out of a UK pension scheme, that are usually an income payment or a transfer to a New Zealand scheme. Income payments are already covered under income tax rules. That just left them with a new system to develop for taxing pension transfers.
The solution they developed was pretty clear that tax would only apply when a UK pension transfer arrived in New Zealand. The system for calculating and paying the tax is, however, confusing and a subject for another day.
So the Inland Revenue had a new (slightly less confusing and more time saving) solution. The problem that they had was what about all the people that had transferred before the new regulations came in on 1 April 2014. Should they let them off with their prior indiscretions of not paying tax. Simple answer was: No! (well sort of)
So is the Inland Revenue being mean?
The solution that the Inland Revenue came up with was to let everyone either sort out their old tax situation or declare under an ‘amnesty’. The ‘amnesty’ let’s people declare 15% of their transfer as income and then pay tax on it. For someone who had been in New Zealand a long time this looked like a good deal compared with having to calculate years of back tax.
So the Inland Revenue sent out notices to people telling them to cough up on the previous transfers at the ‘amnesty’ rates. These letters have been sent as very few people had volunteered to pay under the ‘amnesty’ – to be fair the Inland Revenue never really people know about it.
Like it or not the act of transferring a UK pension to NZ before 1 April 2014 was not what has caused the tax bills
So getting back to some of the original questions. The main one going around seems to be the blame game for who should have told people the Inland Revenue was about to send a letter asking for a whole lotta cash. People have blamed the financial advisers, the schemes that they transferred into and whole lot of others. At the end of the day everyone before 1 April 2014 had an obligation to be declaring his or her holding in a UK pension while it was in the UK. ‘No one else did’ or ‘I didn’t know about it’ are not valid defenses for not paying the tax. So people can either take the ‘amnesty’ or calculate the tax they should have paid.
Thankfully things are now simplier
For everyone that has not transferred their UK pension to New Zealand the tax rules are now simplier and you can assess them as part of the transfer decision. Any qualified pension transfer specialist will let their clients know what their tax liability on the pension transfer will be (under two methods) and how they will have to pay the tax. It is important to know this as it effects many people’s decisions on pension transfers.
If you have received a notice of audit from the IRD you should know that there are many potential avenues for you to follow to get resolution on it and the best place to start is either an expert tax adviser or pension specialist.