United Kingdom pensions and OM-IP Investments are two matters that are about to become more important for many taxpayers/investors.
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 on April 6, 2006.
As you may recall from an earlier Sharp As Tax, 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. These rules generally seek to tax realised and unrealised gains on foreign investments.
However, since April 6, 2006, a large proportion of UK pensions (other than state pensions) that may be transferred to New Zealand funds should have been 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 pension funds service providers has been contacted by the IRD, and has been required to provide details of all UK pension holders who have transferred their pensions to New Zealand funds for a period since April 6, 2006. This is stage one of the ongoing IRD process.
In essence, the low hanging fruit for the IRD are those pensions that have been transferred to NZ between April 6 and today, as up until the date they were actually transferred, the were subject to the FIF rules (unless the person was a transitional resident), and probably produced some taxable income which was generally not returned.
Stage two will be data matching with UK authorities to identify those pension funds that have not been transferred to NZ yet, and thus may still be FIFs.
Similarly, New Zealand investors in OM-IP funds have a FIF interest that is taxable in New Zealand, even though the funds were/are managed in Australia. This is because the fund is resident in the Cook Islands, and thus not exempt from the FIF regime.
This has been an area of focus for the IRD for some time. We understand the IRD has details of about 37,000 investors in OM-IP and has publicly called for those people to voluntarily disclose their FIF income. To date, we understand that 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 soon) the IRD will start pursuing those investors directly.
Our advice to anyone who has or has had an interest in a UK pension fund or an OM-IP investment is to proactively seek professional advice. It has been our experience that a proactive disclosure may not avoid the tax consequences (which, because of market conditions, may not be too bad) but have greater success in eliminating penalties and interest. Given the de minimis threshold for the FIF rules applying to investments is a cost base of $50,000 (generally), then it may also be a case of confirming that there is no exposure to IRD scrutiny via disclosure. Act before the IRD cometh.
• Scott Mason is a tax principal at WHK in Dunedin.
