Taxation (International Investment and Remedial Matters) Act 2012 - new residents' superannuation schemes and the foreign investment fund (FIF) rules.

Section EX 42

The exemption from the FIF rules for rights in a foreign employment-related superannuation scheme has been amended to properly reflect the policy intent. The exemption applies to contributions made while a person is non-resident or in the first four full income years after becoming resident. This amendment will ensure that ongoing fluctuations in the value of those exempt contributions, which occur after the four-year period ends, are also exempt from attribution under the FIF rules.

Background

The FIF rules contain an exemption for certain rights held in a foreign employment-related superannuation scheme. The exemption was introduced in 1992 and extended in 2006. Contributions to a qualifying foreign superannuation scheme made before a person became resident or in the first four full income years after becoming resident (the "exempt period") are not treated as being part of an attributing interest in a FIF. Contributions made outside the exempt period are attributing FIF interests (if they exceed the $50,000 minimum threshold).

The policy intent is for ongoing gains and losses in the value of the non-attributing contributions made during the exempt period - for example, arising from investment gains or exchange rate fluctuations - to also be non-attributing interests. This policy was reflected in the original legislation. Since 2006, however, ongoing fluctuations in the value of contributions made during the exempt period have inadvertently been attributable. Whether gains are exempt from the FIF rules now depends on when those gains accrued, not on which contributions they are attributable to. This was an unintended consequence of rewriting the formula in section EX 42 of the Income Tax Act 2007 to incorporate the extension.

The result is that a portion of a person's foreign superannuation interest could be non-attributable one year and attributable the next, even if that person made no further contributions after the end of the fourth full income year since becoming resident.

Key features

Section EX 42 has been amended to ensure that the policy intent of the provision is achieved. The exemption from the FIF rules for interests in a foreign employment-related superannuation scheme will apply to:

  • contributions made while a person is non-resident or in the first four full income years after becoming resident; and
  • gains and losses in the value of those contributions that accrue after the end of the four-year period (section EX 42(2)(c)).

In other words, if a person does not make any further contributions to their foreign superannuation scheme after the end of the four-year period, they will not have any attributable FIF income in relation to that foreign superannuation interest.

Contributions made after the four-year period ends, as well as ongoing gains on those contributions, will remain attributing FIF interests subject to the $50,000 minimum threshold.

Note that contributions and associated gains that are exempt from the FIF rules under section EX 42 may still be taxable on distribution to a New Zealand resident.

Application date

The amendment applies from the date of Royal assent, being 7 May.