The below is a guest article by Jim Smith of Pacific Wealth - The article solely reflects the opinion of Pacific Wealth and should not be treated as content of The US Tax Team New Zealand Ltd.
Two of the most common questions for US citizens living in NZ are 1.) Should I join KiwiSaver? and if already a member 2.) How can I ensure my KiwiSaver is efficient from a US tax perspective?
Neither of the answers to these questions are simple and will depend on your individual circumstances. But in this article, we seek to highlight some of the issues and explore some of the potential solutions.
Background
The US is one of the few countries in the world to base tax obligations on citizenship status.
This means if you are a US citizen or green card holder and you are tax resident in New Zealand, you will remain subject to US tax laws.
This creates additional complexities for US citizens living in New Zealand in a number of areas, but particularly around KiwiSaver.
What is KiwiSaver?
KiwiSaver is a voluntary based retirement saving scheme provided by the private sector.
Employee, PAYE contributions are made from after-tax income at the rate of 3%, 4%, 6%, 8% or 10% of gross income.
Employer contributions are set at a minimum of 3% provided the employee makes at least a matching contribution (but the employer contributions could be higher).
Employer contributions are taxed as employee income.
Subject to certain criteria, all KiwiSaver members aged between 18 and 64 years that contribute at least $1,043 per annum are eligible for a government contribution of $521 each year.
KiwiSaver funds are usually locked in until the investor is eligible for NZ Super (currently age 65).
▪ Early withdrawals can be made before 65 if the investor suffers significant financial
hardship, buys their first home, is seriously ill or leaves New Zealand permanently.
▪ From an NZ tax perspective, any funds that are withdrawn from KiwiSaver are tax
free, as they have been taxed already.
What are the main issues for US citizens?
▪ KiwiSaver schemes are typically set-up as Trusts in NZ to safeguard the underlying
assets. However, for US citizens this is likely to create reporting obligations as
membership of a KiwiSaver scheme can be considered an interest in a foreign
trust.
▪ US tax laws are also not clear on how to tax KiwiSaver funds and there are different
interpretations by tax advisers. However, depending on the treatment, the
underlying investments can get caught by the Passive Foreign Investment
Companies (PFIC) tax rules.
▪ The PFIC tax rules are a complicated set of rules introduced as part of the US Tax
Reform Act of 1986. The rules aim to prevent US taxpayers from deferring tax
on income earned through certain foreign investments.
▪ Investments that often get caught by the PFIC regime are funds that originate
outside of the US such as New Zealand Portfolio Investment Entities (or PIEs),
Australian Unit Trusts (or AUTs), as well as investing through savings platforms
that have ‘factional share’ ownership arrangements and as such you don’t
directly own the underlying investments.
▪ Typically, most of the fund structures found in KiwiSaver’s get caught by the
PFIC rules and thus incur additional tax and compliance costs.
What should US citizens do?
▪ In many instances, US citizens may want to avoid KiwiSaver altogether, particularly
if contributing the minimum just to obtain the government tax credit.
▪ However, if avoiding KiwiSaver means giving up on valuable employer
contributions, joining can still be beneficial.
▪ You should check with your US tax adviser how your specific KiwiSaver will
be treated from a US tax perspective.
▪ However, in most cases you should seek to only select investments that are
compliant with the US PFIC tax rules – this is discussed further below.
What are my options?
At the time of writing there are only two KiwiSaver providers offer the investment flexibility to select PFIC compliant investments.
These are the Craigs KiwiSaver Scheme, and the KiwiWRAP KiwiSaver from Consilium.
The Craigs KiwiSaver Scheme can be accessed directly from the Craigs Investment Partners website https://craigsip.com/documents/craigs-kiwisaver-scheme
The KiwiWRAP KiwiSaver Scheme (https://www.kiwiwrap.co.nz/) is only available via approved financial advisers and has a $50,000 minimum investment. However, the overall costs are likely to be lower than Craigs and therefore in many cases may be the preferred option.
What investments can I select?
Both KiwiSavers mentioned above offer a very wide range of investments. Many of these will be caught by the PFIC rules, but both have options that should be PFIC compliant.
To be compliant with the PFIC rules you have the option to directly invest into the shares of specific individual listed companies.
But to create a well-diversified investment strategy, many investors may prefer to use US listed Exchange Traded Funds or ETFs.
ETFs can hold 100s if not 1,000s of underlying companies and therefore provide the building blocks for a well-diversified investment portfolio.
US ETFs are listed on US stock exchanges and approved by the US Securities and Exchange Commission (SEC). Consequently, these investments should be compliant with the US PFIC tax rules.
You should select investments based on your risk tolerance, financial objectives and any investment preferences you may have.
However, just as an example, you could select the Vanguard Total World Stock Index Fund (VT.US) which invests in over 9,000 developed and emerging market companies from around the world and costs 0.07% p.a.
There are many other options to choose from and you may wish to consultant a financial adviser to help you develop a strategy that is suitable for your specific
situation, risk tolerance and objectives.
Changing KiwiSaver providers
If you have not been reporting your KiwiSaver investments as PFICs or intend to change providers, you should speak to a member of the US Tax Team.
David Tzimenakis, US Tax Team Director, explains “Whilst holding PFIC compliant investments going forward will simplify your tax reporting, If you have not been reporting your KiwiSaver investments as PFICs, changing providers could give rise to a taxable event as the ‘cost basis’ is stepped upped. You may therefore wish to speak to a member of the US Tax Team, to understand any tax implications, before changing providers”.
Important information and seeking professional advice
Please note that the information contained in this article is general in nature and should not be considered as individual advice.
You are strongly encouraged to seek professional tax and financial advice that is relevant to your individual situation and objectives.
This article was prepared by Pacific Wealth, a specialist independent wealth management firm dedicated to helping new migrants and returning Kiwi’s from US, UK and other regions navigate the international complexities and achieve long-term success in New Zealand.
Please contact Pacific Wealth if you have any questions about this article or if you would like to schedule a no obligation consultation to discuss your situation. Email: info@pacificwealth.co.nz Website: www.pacificwealth.co.nz