Tax treatment of New Zealand superannuation and the veteran's pension payable overseas

2009 legislation introduces changes to the income tax treatment of NZ superannuation and the veteran's pension, which are payable overseas.

Sections RD 5 and YA 1 of the Income Tax Act 2007

Changes have been made to the income tax treatment of New Zealand superannuation and the veteran's pension, which are payable overseas. The entitlement to these pensions has been expanded. These pensions will not be subject to New Zealand income tax if the recipient is residing overseas, but will remain taxable if the recipient is travelling overseas and not residing in a country outside New Zealand.

Background

Full New Zealand superannuation and the veteran's pension previously generally ceased to be paid to persons who were out of New Zealand for more than 26 weeks. A payment of New Zealand superannuation or the veteran's pension to a person outside New Zealand is called a portable New Zealand superannuation or a portable veteran's pension. Normal New Zealand superannuation and the veteran's pension are taxable. However, section CW 28 of the Income Tax Act 2007 exempts payments of portable New Zealand superannuation and the portable veteran's pension from income tax. The policy basis for the exemption is that the recipient's country of residence should have sole taxation rights on this pension income because it is responsible for providing public services and support infrastructure for the recipient.

The New Zealand Superannuation and Retirement Income Amendment Act 2009 and the War Pensions Amendment Act 2009, which came into force on 5 January 2010, expand the entitlement to New Zealand superannuation and the veteran's pension payable to people who are outside New Zealand for more than 26 weeks in certain circumstances. This makes it easier for superannuitants and veteran pensioners to travel or retire overseas while retaining their entitlement to New Zealand superannuation or a veteran's pension.

Key features

The definitions of "portable New Zealand superannuation" and "portable veteran's pension" in section YA 1 of the Income Tax Act have been amended to exclude pensions paid to persons who travel overseas for more than 26 weeks but do not reside in a country outside New Zealand. This amendment ensures that these pensions remain subject to New Zealand income tax.

This is because these travellers will still generally be resident in New Zealand and should, in accordance with existing policy, be taxed in New Zealand on their New Zealand pension income. A tax exemption should apply only to people who have permanently emigrated, not to those who are residing in New Zealand but are travelling overseas. Also, a person travelling overseas would not generally be subject to any income tax liability in the countries in which they are travelling.

Once a person ceases travelling and resides in a country with which New Zealand does not have a social security agreement, payments of New Zealand superannuation and the veteran's pension will be treated as exempt income (that is, they will become "portable New Zealand superannuation" and "portable veteran's pension" as defined in section YA 1 of the Income Tax Act).

Payments of New Zealand superannuation and the veteran's pension to persons travelling outside New Zealand for more than 26 weeks will not have PAYE deducted, as provided in section RD 5. Instead, these individuals will need to include this income in their tax return each year. Inland Revenue will have access to information about these payments.

Application date

The amendment applies from 5 January 2010.