UK PENSIONS AND OM-IP - THE IRD IS COMING!
The Inland Revenue Department (“IRD”) has recently confirmed its position in relation to UK pension schemes and the implications of the Qualified Recognised Overseas Pension Scheme (“QROPS”) changes that came into effect from 6 April 2006.
As you will recall, the ability for New Zealand taxpayers to transfer their UK pensions to New Zealand largely came about because of the QROPS changes in the UK.
Up until that change in the UK rules, employment related UK pensions were generally exempt from the Foreign Investment Fund (“FIF”) rules in New Zealand. However, since 6 April 2006, UK pensions (other than State pensions) that may be transferred to New Zealand funds will be taxed under the FIF rules, subject to the de minimis exemption applying. We note that not all UK pensions can take advantage of QROPS, and as such we recommend that you obtain advice on the specific restrictions that may apply to any UK pension to understand the tax treatment of it.
We understand that one of the largest ‘transfer of funds’ service providers has been contacted by the IRD, and required to provide details of all UK pension holders that have transferred their pensions to New Zealand funds since 6 April 2006. This is Stage One of the ongoing IRD process.
Similarly, New Zealand investors in OM-IP funds have a FIF interest that is taxable in New Zealand, even though the funds are managed in Australia. This is because the fund is resident in the Cook Islands and not exempt.
This has been an area of focus for the IRD for some time. We understand the IRD has details of approximately 37,000 investors in OM-IP and has called for those people to voluntarily disclose their FIF income. To date, only a few hundred disclosures have been made.
We are advised that once the Tax Information Exchange Agreement between New Zealand and the Cook Islands comes into effect (which will be some time soon) the IRD will start pursuing those investors.
How it affects you
Anyone that may have a FIF income tax liability, either as a result of a UK pension or an investment in OM-IP, the time to seek specialist taxation advice on how best to approach the position in their circumstances is now.
TAXATION RELIEF FOR EARTHQUAKE VICTIMS REVISITED
On 24 May 2011, the Taxation (Canterbury Earthquake Measures) Bill was enacted, providing tax relief for employers making welfare contributions to employees; changes to the definition of family scheme income for Working for Families Tax Credit (WFFTC) entitlements to exclude payments made to relieve the adverse affects of declared emergency events from the family scheme income definition; an extension to the redundancy tax credit to 30 September 2011; and giving tax relief regarding donated trading stock.
Two Determinations have since been issued confirming payments made between 1 April 2011 and 3 September 2011 to relieve the adverse affects of the 4 September earthquake and payments made between 1 April 2011 and 21 February 2012 to relieve the adverse effects of the 22 February earthquake will not be included in the person’s family scheme income for WFFTC purposes.
The proposed changes regarding depreciation issues and the timing of loss-of-profits insurance claims are to be included in separate legislation to be introduced later in the year.
Any business receiving loss-of-profits insurance proceeds will be required, at present, to include those proceeds as income in the year in which the claim is made and the income is derived. Relief is expected to allow a deferral in the derivation for those proceeds.
Such relief is necessary as the current rules require that, if you received a payment prior to 31 March 2011 or became entitled to insurance proceeds as at that date, you will need to include the income in that 2011 tax year.
How it affects you
If you have, or are entitled to receive, loss-of-profits insurance proceeds, you should seek specialist taxation advice before filing your 2011 income tax return - pending legislation addressing the taxation relief possibilities for these payments.
If you receive any payment from the Government to relieve the adverse affects of either earthquake, we recommend you confirm with your advisor that the payment will not be taken into account when calculating your WFFTC entitlements.