Simon Swallow explains the big differences between the two methods the IRD gives you to transfer foreign pensions to NZ

By Simon Swallow*

There has been lots of recent attention on the IRD’s plans to introduce a new tax regime on foreign pensions and the fact that the IRD are offering a special amnesty rate of only having to declare 15% of any foreign pension transfer as income.

This obviously looks really attractive when the amount of a transfer that you have to declare as income can rise to up to 100% post 1 April 2014.

Lifting the hood a little more on the legislation, the above analysis is based on what is called the “schedule method” (which is where the longer you have lived here the higher the tax on transfer) but there is a second method the “formula method”.

The “formula method” involves a more complicated set of equations, a whole lot more background information and a two page worked example by the IRD to explain it.

Boiling it down into it’s simplest terms, if the value of your foreign pension, in New Zealand dollar terms, was worth more four years after you arrived in New Zealand than when you transferred it to New Zealand you will have NO tax to pay on transferring your pension to New Zealand.

The fact that you have nothing to pay is obviously going to be better than declaring 15% of your transfer value as income.

The strong New Zealand dollar rides to the rescue

Because everything needs to be reported in New Zealand dollars under the “formula method” the strengthening of the New Zealand dollar in recent years means that peoples overseas fund values may have stayed static or decreased in New Zealand dollar terms.

The easiest way to demonstrate the exchange rate effect is looking at the exchange rate adjusted performance of the FTSE100.

This shows that compared to the current value in most years the value was either higher or close to the current value as shown in ths chart.

This could be great news for many people that have returned from the UK or immigrated to New Zealand who have been worrying about their tax bills after 1 April 2014.

If you don’t know past fund values you can’t use the “formula method” – this badly affects final salary schemes

The need to be able to determine the value of your overseas pensions at the time that your 4 year grace period expired – basically the value four years after entering New Zealand.

This is fine for defined contribution schemes where the values are online and you can go back to the administrator of the scheme or old statements.

However, if you have a final salary scheme you will probably not have a historical valuation (as they need to be specifically produced and are generally not done so retrospectively).

Because you don’t have this valuation you will have to use the “schedule method” and if you have been in New Zealand for seven years or more you will be more tax advantaged transferring prior to 1 April 2014 and taking advantage of the IRD amnesty.

More information on this can be found on www.qropsnz.com

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Simon Swallow is a director of Charter Square. You can contact him here.