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Brief Counsel

KiwiSaver and super: portability and problem-solving

05 February 2010

Chapman Tripp has prepared a submission outlining our concerns with the trans-Tasman retirement savings portability provisions and KiwiSaver amendments in the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill.

The Bill prescribes some important, and very welcome, changes and has our enthusiastic support.  However there are anomalies which must be addressed and improvements which should be made.

This Brief Counsel summarises the key proposals and sets out our views.

Trans-Tasman savings portability

KiwiSavers who leave the country permanently can now, immediately on emigration, transfer their KiwiSaver balances to approved overseas schemes (to date, none have been approved for this purpose).  Alternatively, not less than 12 months after emigrating, they can withdraw their KiwiSaver balances in cash.  In each case, KiwiSaver member tax credits are forfeited to Inland Revenue.

The trans-Tasman portability proposals reflect the arrangements concluded between our Minister of Finance and the Australian Treasurer in July 2009.  They will take effect not more than 2 months after New Zealand and Australia have exchanged notes confirming that each has enacted the necessary legislation (likely during the second half of 2010).

Overview of proposals

A KiwiSaver member who has permanently emigrated to Australia will be permitted at any time to transfer their entire KiwiSaver balance (including KiwiSaver member tax credits) to an Australian complying superannuation fund regulated by the Australian Prudential Regulation Authority.  If the member does not transfer their KiwiSaver balance to an Australian fund, it must remain in KiwiSaver.  Members will no longer be allowed to withdraw their KiwiSaver balances in cash on emigrating to Australia.

Correspondingly, the Australian legislation will be amended to allow a member of an Australian complying superannuation fund who has emigrated to New Zealand to transfer their balance to a KiwiSaver scheme.

Once moneys have been transferred between the two countries, members will not be permitted to transfer them to a third country in any circumstance (but can return them to the country of origin if they emigrate back again).

It will not be compulsory for any Australian or New Zealand scheme to accept trans-Tasman transfers.

Post-transfer withdrawals

Once funds have been transferred, generally speaking the withdrawal rules of the host country will apply.  Importantly (and usefully), it has now been determined that the standard KiwiSaver death, hardship and serious illness withdrawal provisions will apply without modification to funds transferred from Australia.  The earnings on the transferred amounts will also be treated identically, for all withdrawal purposes, to standard KiwiSaver contributions.The key differences in terms of withdrawal restrictions (when compared to each country’s standard rules) will be:

Funds to KiwiSaver from Australia

Funds to Australia from KiwiSaver

Can be accessed at or after age 60, if the member satisfies the retirement definition in Australian legislation*

Cannot, generally speaking, be accessed until the KiwiSaver end payment date (usually 65)

Cannot be accessed for a home purchase

Cannot be transferred to a self-managed superannuation fund

* This is a somewhat intricate test.  Feel free to contact us for an explanation. 

Taxation

Transfers between New Zealand and Australia will be exempt from entry or exit taxes (in New Zealand, the amount transferred will be exempt income at point of entry, and there is already no exit tax).  The only exception is that Australia imposes a cap (currently A$150,000) on the personal superannuation contributions that an individual can make tax-free in a particular year.  Transfers from KiwiSaver will be subject to this cap when initially entering the Australian system (though up to 2 more years’ contributions can be brought forward).  However, the cap will not apply to New Zealand or Australian-sourced superannuation contributions re-entering Australia. 

KiwiSaver member tax credits will not be payable on amounts transferred to KiwiSaver from Australia.

As to the merits of transferring, we and other commentators have highlighted the differing “headline” rates of investment income tax (lower in Australia) as a relevant factor.  Others observe, validly, that the benefits of the PIE regime’s capital gains tax exemption for New Zealand shares and qualifying ASX-listed Australian shares are sometimes undersold (and a growth investing focus may mean less investment income tax is payable in New Zealand than Australia).

Issues

Areas in which we have concerns (and are making submissions) include:

Fees

The Bill proposes that all fees - which will include management and administration fees deducted from unit prices - be deducted first from New Zealand-sourced funds, then from Australian-sourced funds only to the extent that other balances are insufficient.  This requirement seems unworkable as it would necessitate duplicate unit prices and make it impracticable to invest Australian-sourced funds in underlying unitised products.

The relevant requirement in the inter-government agreement is that “any decrements to retirement savings would first be applied to host country retirement savings”.  We think this requires only that any partial withdrawal from a KiwiSaver scheme must be sourced first from New Zealand savings, then from transferred Australian savings.

Invalid enrolments

The Bill proposes that if an invalid KiwiSaver enrolment is not later validated under the KiwiSaver Act’s provisions then any net amount transferred from an Australian scheme must be transferred back to “that scheme”.  This will be impossible where that scheme does not allow transfers from KiwiSaver or otherwise refuses to accept the transferred amount.  The affected individual should be able to choose another Australian scheme or, if this does not happen, Inland Revenue should be able to choose a default scheme (then notify the member).

Exclusion of NZ complying funds

Trans-Tasman transfers are not permitted into or out of locked-in (i.e. materially KiwiSaver-equivalent) accounts in any of New Zealand’s 30 or so complying superannuation funds.  This prohibition needs to be reviewed as it conflicts with the Bill’s stated aim of supporting labour market flexibility.  Many complying superannuation funds involve large trans-Tasman employers (for example in the banking, industry and media sectors).

The focus of negotiations to date has been to get, then bed in, a base agreement with Australia.  However we understand that amendments to include New Zealand complying funds, and possibly other schemes, are not entirely off the table and may be possible either at inception or in due course.

KiwiSaver remedials

Minors’ enrolments

Currently, the KiwiSaver Act is silent on who can contract with a KiwiSaver provider on behalf of a minor, and at what age minors can sign an application for themselves.The Bill proposes clarifying matters by prescribing that:

  • persons aged under 16 may be enrolled only by legal guardians and may not enrol themselves, and

  • persons aged 16 or 17 must co-sign with legal guardians in order to enrol (meaning guardians cannot enrol them without consent and they cannot enrol without guardians’ consent) unless they have no legal guardian.

The commentary on the Bill observes that, for consistency with the Care of Children Act, if there is more than one guardian then all guardians must act jointly.  However the Bill itself does not currently reflect that requirement.  It could also usefully address who may exercise discretion for minors (for example as to investment choice) after joining.

These amendments will help provide certainty and clarity, but are in our view missing an important ingredient.  An oath or statutory declaration from a signatory should suffice in order to verify guardianship (or lack thereof), relieving providers from what would otherwise be onerous evidentiary requirements. The legislation could also usefully allow one guardian to confirm (again by oath or statutory declaration) that he or she is acting for both or all guardians jointly.

Annual reports by hyperlink

KiwiSaver scheme members (other than those with inactive accounts, as defined) must be given annual reports within six months of each year-end.  If members provide email addresses, annual reports may be delivered to them as email attachments.  However, because they do not involve “giving” reports to members, hyperlinks are not permitted.

To reduce compliance costs and other issues (for example, firewalls or lack of capacity in members’ email accounts, necessitating hard copies), the Bill proposes allowing providers to send hyperlinks in emails which link to annual reports, where members have expressly agreed in writing to this arrangement.

We think this is unnecessarily bureaucratic and cumbersome and that it should suffice for a member simply to have provided an email address.  Section 219(1) of the KiwiSaver Act prescribes that providing an email address is treated as consent “to use, provide, or accept information in an electronic form for the purposes of this Act and the Electronic Transactions Act 2002”.

When we proposed to Inland Revenue last July that KiwiSaver schemes be permitted to deliver annual reports by hyperlink, we urged that registered superannuation schemes also be covered.  That remains our view.  We understand the point was to be discussed between agencies.

Children’s contributions

The Bill will clarify that where no PAYE deduction is required from a child’s wage (because the child earns less than $2,340 a year) no wage-sourced KiwiSaver contributions are required either.

Home purchase withdrawals – prior leasehold estates

The Bill proposes deleting the current prohibition (with exceptions) on withdrawing KiwiSaver savings to put towards a home purchase if the KiwiSaver has previously held a leasehold estate.  This deletion, aimed principally at prior residential tenancies, will also mean that owning a residential home under a prior registered long-term lease of (say) council or Māori land, will not prevent a home purchase withdrawal or, by extension, the receipt of a KiwiSaver home deposit subsidy.

Missed opportunities?

Because the Bill is remedial, policymakers should take this opportunity to clarify that the KiwiSaver Act does not limit the application of relevant contract and consumer protection legislation (and to prescribe that, when any membership contract is cancelled, the repayment provisions relating to invalid enrolments are treated as applying).

Successors in business should also be permitted to invoke the (otherwise grandfathered) provisions for employer exemptions from the KiwiSaver automatic enrolment rules.

For further information, please contact any of the lawyers featured.

Contacts