Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 updates provisions on overseas social security-type benefits and pensions.

Sections CW 28, MB 1, "New Zealand superannuation", "New Zealand superannuitant", and "veteran's pension" in section YA 1 of the Income Tax Act 2007 and section 70 of the Social Security Act 1964

Some provisions relating to overseas social security-type benefits and pensions (overseas benefits) in the Income Tax Act 2007 have been rationalised to simplify and update them in line with other legislative changes.

Background

Under section 70 of the Social Security Act 1964, a person's entitlement to a New Zealand benefit is reduced if the person is entitled to, or receives an overseas benefit that is of a similar nature to the New Zealand benefit. This is referred to as the "direct deduction policy". Under this policy, a person's entitlement to a New Zealand benefit is reduced directly on a dollar-for-dollar basis by the amount of the overseas benefit.

The rationale for this direct deduction policy is to ensure that all New Zealand pensioners and beneficiaries receive an equitable level of social security-type benefits, regardless of whether this amount is fully funded by New Zealand or is a combined amount of New Zealand and overseas government-provided benefits.

New Zealand benefits covered by section 70 include New Zealand Superannuation, the veteran's pension and income-tested benefits (such as Jobseeker Support or Sole Parent Support).

Section CW 28(1)(e) of the Income Tax Act 2007 exempts certain overseas benefits from income tax to the extent that the direct deduction policy in section 70 of the Social Security Act 1964applies.

The interaction between the Income Tax Act 2007 and the Social Security Act 1964 was considered complex. Some provisions also needed updating to reflect other legislative changes.

Key features

The amendments rationalise some provisions relating to overseas benefits in the Income Tax Act 2007 so that these provisions are simplified, particularly the interaction with the Social Security Act 1964. The amendments do not reduce any person's entitlements to New Zealand benefits or change the tax treatment of these entitlements.

Application date

The amendments apply from 17 July 2013, which is the date of enactment of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013.

Detailed analysis

Under the new rules, section CW 28(1)(e) of the Income Tax Act 2007 exempts from income tax certain overseas benefits to the extent that section 70 of the Social Security Act 1964 applies.

Overseas benefits subject to direct deduction

Under the new rules, section CW 28(2)(a) of the Income Tax Act 2007 exempts from income tax an overseas benefit that is subject to the direct deduction policy in section 70(1) of the Social Security Act 1964 to the extent that the overseas benefit reduces:

  • a New Zealand monetary benefit paid under the SSA; or
  • a New Zealand monetary benefit, other than New Zealand Superannuation or a veteran's pension, paid under the Social Welfare (Transitional Provisions) Act 1990.

The tax exemption is intended to equalise the amount a person entitled to a New Zealand benefit receives in their hand irrespective of whether or not they also receive an overseas benefit. The tax exemption is necessary because the rates of New Zealand monetary benefits paid under the Social Security Act 1964, which excludes New Zealand Superannuation and the veterans' pensions, are set in legislation at the net rate and grossed-up for income tax purposes.1 The direct deduction policy therefore reduces the net rate of the New Zealand benefit by a dollar for every gross dollar amount of overseas benefit received.

Note that this exemption does not apply to overseas pensions that are of a similar nature to New Zealand Superannuation and a veteran's pension. The New Zealand monetary benefits paid under the Social Security Act 1964 exclude New Zealand Superannuation and the veteran's pension.2 A person who receives an overseas pension that has an effect of reducing New Zealand Superannuation or a veteran's pension is taxed on the overseas pension amount. This is because the rate of New Zealand Superannuation or the veteran's pension is set in legislation as a gross rate, so the direct deduction policy is reducing the gross rate dollar-for-dollar against the gross amount of overseas benefit.

Section CW 28(2)(a)(i) of the Income Tax Act 2007 has been amended to no longer refer to monetary benefits paid under Part 1 of the Social Security Act 1964 to reflect changes to that Act. Monetary benefits have been relocated from Part 1 to other parts of the Social Security Act 1964 over the years, and again were restructured as part of the Social Security (Benefit Categories and Work Focus) Amendment Act 2013. Section CW 28(2)(a)(i) of the Income Tax Act 2007 now refers to monetary benefits under the Social Security Act 1964.

Special banking option

Under section 70(3) of the Social Security Act 1964, a special banking option is available for those who receive an overseas benefit from certain countries, namely the United Kingdom, Ireland, Jersey, Guernsey, Australia and the Netherlands.3 The special banking option is an alternative deduction method which involves less complex administration and compliance costs around exchange rate movements.

An eligible person may elect into the special banking option to have their overseas benefit paid directly into a special bank account managed by the Ministry of Social Development (MSD). The person does not have access to the funds in this account, but in turn they receive an amount equivalent to the New Zealand benefit. Note that New Zealand benefits that can be subject to the special banking option include New Zealand Superannuation, the veteran's pension and monetary benefits paid under the Social Security Act 1964.

Under the new rules, section CW 28(2)(b) exempts from income tax overseas benefits that are subject to the special banking option arrangement. This tax exemption is intended to prevent double taxation of both the amount of overseas benefit (received by MSD in a special banking option account) and the New Zealand benefit a person receives under the special banking option from MSD. A person who receives from MSD under the special banking option an amount equivalent to the full amount of New Zealand benefit is liable to New Zealand tax on that amount. Exempting the amount of overseas benefit from income tax reflects the fact that the equivalent amount they receive from MSD has been taxed as a PAYE income payment.

The changes enacted simplify the interaction between section CW 28(2)(b) of the Income Tax Act 2007 and section 70(4) of the Social Security Act 1964 - that is, to exempt the overseas benefit amount retained by the MSD. The latter part of section CW 28(2)(b) of the Income Tax Act 2007 from "but not to the extent …" and the reference to section CW 28 of the Income Tax Act 2007 in section 70(4) of the Social Security Act 1964 have been repealed. Section 70(4) of the Social Security Act 1964 now deems the amount paid out by MSD under the special banking option as a composite benefit. Repealing the reference to section CW 28 in that section means that section 70(4) can be ignored for income tax purposes.

Family scheme income

Section MB 1(2)(a) includes the amount of overseas benefit, which is tax-exempt under section CW 28(2)(a), in a person's family scheme income, which is used to calculate entitlements to various social assistance programmes, including Working for Families tax credits. Although the amount of tax-exempt overseas benefit is not included in a person's taxable income for the calculation and payment of tax, it is available for the person's day-to-day living expenses and is received alongside a reduced amount of New Zealand benefit under section 70(1) of the Social Security Act 1964. It is therefore appropriate to still count these overseas benefit amounts for social assistance purposes.

The amount of overseas benefit subject to the special banking option, which is tax-exempt under section CW 28(2)(b), is not included in a person's family scheme income. The amount of overseas benefit subject to the special banking option is retained by MSD and it is not available for a person's day-to-day living expenses. It is therefore appropriate not to count these overseas benefits for social assistance purposes. For those who apply the special banking option, an amount equivalent to the full amount of New Zealand benefit is already included in the person's taxable income and captured for social assistance purposes under section MB 1(1) of the Income Tax Act 2007.

Updating definitions

Certain definitions in section YA 1 of the Income Tax Act 2007 have been updated.

References to section 70(3)(b) of the Social Security Act 1964 in paragraph (b)(ii) in the definition of "New Zealand superannuation" and paragraph (b) in the definition of "veteran's pension" in section YA 1 have been repealed. These references were unnecessary because people using the special banking option receive the full amount of New Zealand Superannuation and the veteran's pension under the New Zealand Superannuation and Retirement Income Tax 2001 and the War Pensions Act 1954 respectively. The removal of the reference to section CW 28 of the Income Tax Act 2007 in section 70(4) of the Social Security Act 1964 is consistent with this approach.

Also, references to the Social Welfare (Transitional Provisions) Act 1990 in paragraph (b)(iii) in the definition of "New Zealand superannuation", paragraph (b)(ii) in the definition of "New Zealand superannuitant", and paragraph (c) in the definition of "veteran's pension" in section YA 1 have been repealed. These references were unnecessary because most parts of the Social Welfare (Transitional Provisions) Act 1990 have been repealed.

1Note that the amount of tax for a PAYE income payment that is an income-tested benefit payable or paid under the Social Security Act 1964 is determined by the Commissioner of Inland Revenue in consultation with the chief executive of the Ministry of Social Development. (See section RD 11(3) of the Income Tax Act 2007.)

2 New Zealand Superannuation and the veteran's pension is paid under the New Zealand Superannuation and Retirement Income Act 2001 and the War Pensions Act 1954 respectively.

3See regulation 6 of the Social Security (Alternative Arrangement for Overseas Pensions) Regulations 1996.