Debugging the IRD tax amnesty on Foreign Superannuation Funds from South Africa.
Synopsis for quick reading
The foreign investment fund (FIF) rules which intended to tax interests in foreign investments on an annual basis, was generally ignored by most immigrants. As of 1 April 2014 FIF and other complicated rules will no longer apply to interests in foreign superannuation
- South African Pension Funds as well as Retirement Annuity Funds qualify as foreign Supers
· IRD (the NZ version of the South African SARS) rules in respect of foreign lump sums are changing on 1 April 2014
· Due to the changes NZ Government announced an amnesty that ends on April 1st yet, they have effectively extended this deadline to include all applications (o withdraw from the Super) were filed prior to 1 April 2014 provided the encashment date / entitlement or accrual is reported no later than in the 2014-15, i.e. lump sum must be encashed by 31 March 2015.
· If you elect the amnesty only 15% of the lump sum is taxed and for the highest earners, the effective tax rate is 5% on the lump sum, which is far less than the SA taxes withheld at source;
· SA taxes qualify for a tax credit in NZ – effectively the amnesty will cap your IRD tax at the taxes paid to SARS on encashment
· You can leave the funds in ZA Rand and transfer when, and if the exchange rate improves. No need to convert and send to NZ to qualify for the amnesty
· If you elect not to use the amnesty, you need do nothing until you cash in, as there is no longer an annual IRD tax on unrealised FIF growth
· You need not transfer to a Kiwi Saver but if you did, you can withdraw the IRD taxes from the Kiwi Saver
· SA expats living in NZ for less than 4 years can continue to enjoy the “transitional resident rules” which provides for a 4-year exemption on SA lump sum and other income from SA sources.
· As a general guideline, you need to be in NZ more than 7 years before the 15% amnesty inclusion rate is beneficial. On 7 years the effective tax rate is less than 5% whereas in the 8the year the effective rate jumps to near 7%. But this is not the only test to be done. If SARS taxed you at an effective rate of 25% (near R1.4m RA lump sum) then amnesty is probably not worth it until you reach your 18th taxed year in NZ i.e. 22 years of stay (NZD 155 555 x 75.17 x 33.33% tax = NZD 38 973 which equals 25.05%). The minute any one of the monetary issues change the number of years could be substantially less. For smaller amounts the number of years reduces substantially
· Expressed differently: the new IRD foreign lump sum regime is so favourable, no SA expat living in NZ should could use the fear for additional IRD tax an excuse to delay claiming ownership of their cash bag trapped in SA RA fund.
In short, it is time to speak to us. Ensure you consider the true facts, make the right decision and to ensure the magical 4 year tax exemption opportunity is not missed, and if you have been in NZ for more than 48 months consider the benefits of the amnesty and send that request to encash your SA RA or pension fund, before 1 April 2014. Still unsure how to go about? Provide us with the necessary mandate and we can kick-start the process on your behalf, alternatively for a small fee we provide you with the template letter to be sent.