[Bozeman]

My wife and I recently began considering packing up the (American) family, moving to NZ and living off of our investment income (all investments held in the US). The numbers were looking pretty good until I stumbled across the new tax rules for foreign investments. Unfortunately, it seems that our parade has been rained upon.

Other than our IRAs, 401ks and 403b plans (more on that later), US income tax has been paid on the bulk of our investments. We are now disheartened to learn that should we immigrate to NZ, we would essentially be required (after the four-year grace period) to pay additional tax on this accumulated wealth. I had figured that with carefully planned realization of capital gains, we could limit our US taxable income to less than half of our spending. With low capital gains tax in the US and no capital gains tax in New Zealand, it seemed that the tax burden would be quite managable. The prospect of paying high tax rates on 5% of our investment portfolio on an annual basis has changed everything. Instead of a tax bill (US and NZ combined) of less than 10% of annual spending, we're now looking at 30% or more, depending on how tax-deferred investments are treated by the NZ IRD. Am I missing something or does this new rule truly blow us out of the water?

I have scoured the internet and have found no information on how the NZ IRD treats US tax-deferred investments such as IRAs, 401ks, 403b and 529 plans under the new legislation. Does anyone have details?

Another concern is balancing US and NZ tax. With what are now very different definitions of "income", it seems that this is not so straight forward. The "fair dividend" upon which we would have to pay tax in NZ would not be considered income in the US (other than the part that may be made up of dividend payments). With a large NZ tax bill and a small US tax bill, it seems that it would be in our best interest to try to recognize as much US income as possible (since it would not increase our total tax liability and might save us some money down the road if the rules change again). The idea of trying to claim more income seems strange but the new NZ rules seem to encourage this kind of investment behavior. Any thoughts out there?

Our investments are currently held jointly between my wife and myself and we file jointly in the US. For NZ tax purposes, can the "fair dividend" associated with our investments be divided between us? (I understand that the concept of "married filing jointly" is foreign to the NZ tax code.)

Many thanks for your thoughts. I have learned a lot from this board and hope to learn more...

[suebeenz]

Hi Bozeman, I'm anxiously awaiting someone in the know to reply. If you don't get an appropriate response soon, you may want to try to contact the IRD directly via mail, and request answers via mail.

FYI, I've spoken on the phone to the IRD a few times, and asked about 401K / IRA treatment. Just in case they hadn't heard about 401k or IRAs, I explained to them that they are a bit like kiwisaver. Their response was usually, "Yes, you could sign up for kiwisaver." :roll I didn't get it in writing, but twice they came to the conclusion that they'd likely honor the US tax deferred/retirement schemes. However, I didn't bring up Roth 401k/IRAs though.

[Bozeman]

Hi Suebeenz, I was also coming to the conclusion that I will need to contact the IRD directly. Before we would consider making the leap to NZ, we would need a pretty definitive answer... Hopefully someone will jump in with some good info.

[Silverwing86]

Hi Bozeman,

My apologies, I can't help you with your tax questions, but just wanted to welcome you to the forum and wish you luck with your enquiries. I'm sure many on this forum would also be interested in the outcome, hopefully there's someone on here who can tell you more...

Cheers,
Silver

[tigerlily]

I would suggest that you talk to someone who knows the tax laws in both countries and can look at your investments in particular. Yes, I've read some people's stories on this board of them getting dinged by not having cashed out of all their American investments- but I don't know if that was just stocks, or retirement stuff too.


http://www.emigratenz.org/forum/showthread.php?t=10832
http://www.emigratenz.org/forum/showthread.php?t=4719


Or look at moving to Switzerland, they have an extremely favorable tax structure.

[Bozeman]

Hi Silver, thank you kindly for the warm welcome. I read a lot of posts on the board before posting myself and was pleased to see that the exchanges here are very civil and friendly.

Hi Tigerlily, I did see those posts but thanks for taking the time to point them out. It is pretty clear that we need some professional advice - added to the "to do" list. I'll talk to the wife and kids about Switzerland as soon as I get home from work...

[suebeenz]

Hi Tigerlily, I did see those posts but thanks for taking the time to point them out. It is pretty clear that we need some professional advice - added to the "to do" list. I'll talk to the wife and kids about Switzerland as soon as I get home from work...

Where does Top Gear's Jeremy Clarkson live again? I thought he lived in english speaking tax haven ....

(learning two new languages might be tough ...)

[Helsandfamily]

Where does Top Gear's Jeremy Clarkson live again? I thought he lived in english speaking tax haven ....

(learning two new languages might be tough ...)

Isle of Man,

hels

[phatsharpie]

Regarding 401K and IRA's, this booklet (Overseas Private Pensions) from the IRD should be applicable:
http://www.ird.govt.nz/resources/file/ebe280421310764/ir257.pdf

-B

[Bozeman]

Regarding 401K and IRA's, this booklet (Overseas Private Pensions) from the IRD should be applicable:
http://www.ird.govt.nz/resources/file/ebe280421310764/ir257.pdf

-B

Thanks, B. Now I need to get off my thumb, contact the IRD and ask whether or not IRAs and the like qualify as a "QFPA interest".

[Super_BQ]

As mentioned many times in another thread, IRD has implemented new policies in foreign investment overseas. As a way to prop up KiwiSaver, they conveniently disuade NZ residents who invest overseas (excluding Australia) by taxing their paper profits on capital gains if it breaks a threshold (and if total portfolio exceeds $50k NZ).

Now I may be wrong but I don't believe IRD treats US investments in the form of IRA / 401K plans any different than a person buying shares on the NYSE or Nasdaq directly in an online brokerage account. You will have to pay income tax on the paper gains each year. Unfortunatley in times where you have a loss, the gains you paid in previous years can not be offset by the capital loss in future years. (Does it seem fair? Others will believe it's fair to tax the gain but not give back on the loss)- i've shown an example in another thread of how the new FIF rules could net an overseas investor worse off.

With low capital gains tax in the US and no capital gains tax in New Zealand, it seemed that the tax burden would be quite managable.

In order for you to have tax free capital gains, you would have to liquidate your US investments and re-invest them here in NZ - either in Kiwi Saver or directly on the NZSE. Of course when you sell off your US shares you will trigger a huge capital gains tax in the US.

We havn't even touched the issue about taxing of dividends yet. So here we go. Regardless where you live, dividend income is treated as income tax - that is a dividend paid from a NZ company or from a US company will make no difference on your tax return as both will be taxed the same. You will also find that NZ shares are heavily focussed on dividend payouts (across all sectors) whereas in the US - tech shares like on the Nasdaq focus on capital growth by keeping the profits for further re-investment (growth). Because of the different investment criteria you may find that you're not much better off moving to NZ than staying put in the US.

Of course there's the absense of death tax in NZ which may attract you?

You do realise you will have to renounce your US Citizenship if you fully want to break filing taxes to the IRS? Got beneficiaries living in the US? Bet that the IRS has tabs on them when they receive any inheritance.

I would not be surprised millions are in the same situation as you are - thinking about jumping boat. Don't treat my post as fact. Instead take up the advice of an expert.

BQ

[Bozeman]

BQ, a few comments:

With regard to the quote you highlighted, please note that I used the past tense - meaning that's the way things seemed before I understood the new tax rules. I do understand the implications of the new legislation.

I also understand clearly the tie to the IRS (have lived outside the US for most of my adult life). In fact, renouncing one's US citizenship does not immediately cut the tether. The IRS claims the right to come after former citizens for up to ten years after they have renounced their citizenship if they believe the renouncing was done for tax avoidance reasons.

Finally, I hope the hell you are wrong about the treatment of IRAs and 401k plans. It looks like we are going to make the jump (relocated by my company); we will definitely be seeking tax advice.

Thanks,

B

[phatsharpie]

Hey Bozeman, I was wondering if you have any new info about how IRA's and 401K's are treated tax-wise by the IRD. I would be very interested to hear what the IRD has to say.

-B

[jryorkshire]

Firstly I don't know much about IRA's or 401K Plans.

However, the exemption from the FIF rules for foreign pensions (the old QFPA exemption) is as below (taken direct from the legislation). From my small understanding of IRAs, the main points you have to clear are subsections 3 & 3 (b). This basically says your not allowed to take any current benefit from the IRA before retirement age unless, and this is probably key to your situation, you can prove that by doing so there is a substantial decrease in your future benefits from the IRA. I understand that there are a penalty but the question is can that be described as substantial? I have come across one argument put forward that it was, but I do not know the outcome. Again, I must reiterate that I am not very knowledgeable in respect of IRA's or 401K's but though that this may help.

LEGISLATION

EX 37Non-resident's pension or annuity exemption

Exemption



(1)The rights of a natural person to benefit from a pension or annuity provided by a FIF are not an attributing interest if the requirements in subsections (2) and (3) are met.


Relevant period of non-residence



(2)The person must have provided the consideration for acquiring the rights—




(a)when the person was not resident in New Zealand; or




(b)when the person was resident in New Zealand but in the period ending 3 years after the end of the income year in which they last became a New Zealand resident; or




(c)when the person was resident in New Zealand but as a result of commuting or transferring their interest in a superannuation fund in anticipation of their ceasing to be a New Zealand resident.


Restricted rights to assign or cash in



(3)The person's future benefits must not be able to be assigned, or exchanged for a current receipt of cash (or other property), except—




(a)if the person is assigning the benefit rights to a spouse under a matrimonial agreement; or




(b)at the cost of a substantial decrease in the present value of the benefits.


Elective exclusion of pre-1996-97 rights



(4)Subsection (1) does not apply if—




(a)the rights were acquired before the 1996-97 income year; and




(b)the person chose to treat the rights as an interest in a foreign investment fund for the 1996-97 and later income years by complying with the requirements in section CG 15(4) of the Income Tax Act 1994.

[Bozeman]

Hey Bozeman, I was wondering if you have any new info about how IRA's and 401K's are treated tax-wise by the IRD. I would be very interested to hear what the IRD has to say.

-B

B, Have not yet talked to a tax advisor (but have convinced my company to pay the cost of me talking to a tax advisor!). The information provided by JR above does look positive. I would definitely take a financial hit if I tried to cash out of an IRA or 401k early. In fact, I have no desire to cash out early - only to protect the principle until retirement age.

I'll post if I learn something of interest.