An announcement on the detail of a trans-Tasman retirement savings portability scheme may be imminent, with effect possibly as early as the first quarter of next year. The package, which represents the culmination of more than two years’ work by officials, addresses some of the tax issues involved in creating a single trans-Tasman market for superannuation. But it does not go far enough in our view, with the result that the flow of funds is likely to be much heavier from New Zealand to Australia than vice versa – with negative effects on the pool of New Zealand superannuation savings.
This Brief Counsel examines the expected changes and discusses those further changes we consider necessary to create a level playing field.
The aim of the policy changes is to allow persons moving from Australia to New Zealand, or vice versa, to transfer their locked-in retirement savings from the country where the savings were generated into a scheme in their new country of residence. By allowing (in particular) employment-based savings to be aggregated in one place, there is more likelihood that savings will not simply be left behind and forgotten. This is particularly a problem for Australian superannuation, which currently is not able to be cashed up or transferred by a person leaving Australia permanently.
The key tax change which has been agreed will allow savings to be transferred between the two countries tax free. But other disincentives to transfer savings from Australia to here may remain, specifically:
- The lower taxation rate applying to income earned by funds in Australia, and
- The tougher lock-in requirements applying to the New Zealand scheme.
Unless these are also addressed, the risk is that the flow of funds will be weighted toward Australia.
Tax (and other penalties) on transfer of savings will be eliminated
Planned changes in this area include:
- Provision to allow a person to retain already received member tax credits when transferring funds from KiwiSaver or a complying superannuation fund (CSF) to an approved Australian scheme. Although permanent emigrants out of New Zealand are not taxed on the withdrawal or transfer of their KiwiSaver/CSF funds, currently they do forfeit those tax credit amounts, which are repaid to Inland Revenue. This loss, while not strictly speaking a tax, has the same effect as one.
- A likely quid pro quo for the retention of accumulated tax credit amounts will be that persons emigrating permanently to Australia are no longer able to withdraw their KiwiSaver/CSF balances after 12 months.
- No tax will be charged on transfers from Australian schemes into a KiwiSaver or (possibly) other registered scheme with Australian-equivalent lock-in requirements.
Transfer should not result in tougher lock-in requirements
Australian schemes are like KiwiSaver schemes in that contributors can generally access their savings at will from age 65. But Australia offers a wider range of early access provisions, including (from a “preservation age” that is somewhere between 55 and 60 depending on date of birth) for early partial or full retirement or taking a retirement income stream. KiwiSaver savings are generally locked in until age 65 (with limited early-withdrawal facilities).
To achieve genuine portability, it may be necessary to allow funds transferred from Australia to remain subject to Australian withdrawal rules. This would require fund providers to separately identify the transferred funds (and earnings on them).
For KiwiSaver/CSF funds transferred to an Australian scheme, the issue will be whether those funds can be cashed up if the person later moves permanently to a third country, as is currently the case 12 months post-emigration with KiwiSaver/CSF balances (excluding tax credit amounts).
... or be used to circumvent source country requirements
At the same time, Australia may not want transfers to approved New Zealand schemes to be used as a way to allow Australians to cash up their superannuation savings early. Accordingly, if a person first moves to New Zealand, and then emigrates to a third country, any Australian-sourced savings in the New Zealand scheme might have to remain there, or be returned to Australia.
... but it might result in a higher tax rate on earnings
The immigrant from Australia will no doubt also consider the income tax rate which the New Zealand Government will impose on the earnings generated by their transferred savings. If the savings are left in Australia, the tax rate is either 10% or 15%, and Australian franking credits on dividends can be offset against this liability. However, if the savings are moved to New Zealand, they will generally be taxed at the person’s portfolio investor rate of either 19.5% or 30% (with an exemption for gains from shares in Australian-listed and New Zealand companies).
Unless the New Zealand Government is prepared to provide a concessional tax rate to the earnings on the transferred funds, it seems unlikely that anyone with any significant amounts in Australian superannuation would seek to transfer those amounts to an approved New Zealand scheme.
Providing a concessional tax rate would clearly be in New Zealand’s best interests, so long as it could be limited to the earnings on the transferred funds. It would increase the tax take (since without it, most of the funds will simply stay in Australia). It would, however, involve some administrative complexity for the fund providers.
Which New Zealand schemes should be eligible?
Another issue is identifying the schemes into which Australian savings can be moved. There is no reason to limit these to KiwiSaver schemes. Any registered superannuation scheme should be an acceptable transferee, provided that it imposes the necessary lock-in restrictions on funds transferred from Australia. Because inward transfers from Australia may be expensive to administer, and KiwiSaver schemes are generic in character and subject to reasonable fees constraints, providers may prefer to use non-KiwiSaver schemes to offer portability.
Tax on distributions to New Zealand residents from Australian savings schemes
At least some of the issues addressed by portability could also be addressed by simply exempting from New Zealand tax any withdrawal from an approved Australian scheme. This makes a good deal of sense, since the amounts withdrawn have already been subject to Australian tax in most cases. The imposition of New Zealand tax with no recognition of the Australian tax already paid is a clear case of economic double taxation.
Of course, New Zealand would not give such an exemption unless Australia did the same for withdrawals by Australian residents from KiwiSaver schemes. Because both countries now operate, in substance, a TTE system (taxed contributions, taxed earnings, exempt withdrawals) for their superannuation schemes (with some exceptions in Australia’s case) such a reciprocal exemption is not too difficult to contemplate.
Tax changes to facilitate trans-Tasman retirement savings portability are welcome. However, they need to go beyond ensuring there is no tax on the transfer of funds if they are to be practically effective. As proposed, the changes are likely to lead to funds moving to Australian schemes without much coming back this way.
The implications of this for the New Zealand savings industry, and for New Zealand’s capital markets more generally, are potentially serious.