Inbound Migration Traps

There are some overseas investment products that fall within the category of a foreign life insurance entitlement but also meet the definition of a foreign superannuation scheme. This is problematic.

For example, some jurisdictions have products for long term savings which technically fall within the category of, “rights to benefit from a life insurance policy in relation to which a FIF is the insurer”: see s EX 29(4). As such once a migrant has exhausted his or her transitional residence period they will have an attributing FIF interest and need to pay tax on that interest in New Zealand.

However, that same scheme, can also potentially trigger the definition of a foreign superannuation scheme. The definition of a foreign superannuation scheme takes one to the definition of a superannuation scheme in YA 1, which includes inter alia, a company that is not a unit trust, is not resident in New Zealand, and is established mainly for the purpose of providing retirement benefits to members or relatives of members who are natural persons.

This requires an analysis of the main purpose for which the foreign company or the unit trust was established, so there is plenty of scope for judgment. If the fact pattern fits that definition and the company our unit trust is not resident in New Zealand then it will meet the definition of a foreign superannuation scheme.

Section EX 42B provides that the foreign superannuation scheme is not an attributing FIF interest. But there is still the s EX 29(4) attributing interest by virtue of the product also being a foreign life insurance entitlement.

Section CQ 4 says FIF income is a person’s income. And CQ 5 says that a person has FIF income if they have rights of either of the sorts just mentioned and the rights are attributing rights, and none of the exemptions applies.  The s EX 29(4) right is an attributing interest and s CQ 5(1)(c) does not list s EX 42B as a valid exemption.  

Therefore FIF income must be accounted for.

However, when the foreign superannuation fund matures and a withdrawal is made s CF 3 will apply to the withdrawal amount. That in effect subjects the foreign investment to double taxation. Once as FIF income and once as CF 3 withdrawal income. The calculation formulas applicable for CF 3 are broadly trying to do the same thing as the FIF income tax was, capturing the earnings over the period of ownership as a New Zealand tax resident.

The exemption in s CX 57B arguable does not apply because the CF 3 income is not from an attributing FIF interest.

The best advice may be to make sure the funds in the Foreign Superannuation scheme are withdrawn within the 4-year window upon first becoming a New Zealand tax resident and reinvested in an attributing FIF. That, however, might mean incurring significant penalties imposed by the fund if the withdrawal happens before maturity.

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