Social Assistance (Payment of New Zealand Superannuation and Veterans Pension Overseas) Amendment Bill 2009

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1 Submission to: Social Services Committee New Zealand Parliament Parliament House WELLINGTON In Respect Of: Social Assistance (Payment of New Zealand Superannuation and Veterans Pension Overseas) Amendment Bill 2009 From: Associate Professor Andrew M C Smith School of Accounting and Commercial Law Faculty of Commerce and Administration Victoria University of Wellington Rutherford House 33 Lambton Quay P O Box 600 WELLINGTON Tel: andrew.smith@vuw.ac.nz Background My name is Andrew Smith. I am an Associate Professor in the School of Accounting and Commercial Law, Faculty of Commerce and Administration at Victoria University of Wellington. My teaching and research interests are in the international tax and associated areas. In 2005 I participated in an international comparative tax law conference on social security agreements and double taxation in Austria and presented a national report for New Zealand. That piece of work has been developed into a Working Paper which has just been published by the Centre for Accounting Governance and Taxation Research at Victoria University. 1 The opinions expressed in this submission are my own as a university researcher. Responsibility for the content is mine alone. I do not seek permission to appear before the Committee. However, I am willing to do so should the Committee wish me to appear. 1 New Zealand s Social Security Conventions: Merely Double Taxation Agreements In Reverse?, Working Paper No. 68, Centre For Accounting Governance and Taxation Research, School of Accounting and Commercial Law, Victoria University of Wellington, May 2009, 36 pages.

2 - 2 - General Comments I support the general thrust of the proposed changes. What is proposed is much fairer than the current treatment and means that the quantum of New Zealand Superannuation payable outside New Zealand is more likely to be commensurate with the contribution the superannuitant has made to the New Zealand tax base during their working lives. It also addresses the weakness of the current law that elderly parents who migrate to New Zealand as dependents of their children can receive New Zealand Superannuation offshore after 10 years of residency even though they may have contributed very little to the New Zealand tax base. The proposed reforms do not concern portability pursuant to a social security agreement. However, I believe that proposed changes to general portability must be considered along with portability under a social security agreement and I have included some comments on this issue at the end of this submission. The proposed changes also have implications for general eligibility for New Zealand Superannuation and I believe there should be a review of the existing eligibility criteria for the benefit especially in the context of increasing migration to/from New Zealand. Specific Points of Submission: (1) Clause 6 Proposed Section 26(5) This part of the Bill determines the period of New Zealand residency used to calculate the amount of New Zealand Superannuation payable outside of New Zealand under the portability provisions. I believe that it needs to be clear in section 26 that totalisation provisions of a social security convention to which New Zealand is a party to cannot be used in the calculation of the period of New Zealand residency for the purposes of general portability. While I understand that is case now, the legislation should make it unambiguously clear. There should be no risk to the New Zealand taxpayer that an individual from Country X could argue before a New Zealand court that the totalisation provisions of the Country X-New Zealand social security agreement enables them to have a pension paid to them in a third country at the expense of New Zealand taxpayer under section 26. (2) Clause 6 Proposed Section 26(5) The key phrase resident in New Zealand is not defined in the Act and is left to common law principles. While I accept there may be good reasons to leave this to common law principles, I believe there are certain situations where there should be statutory guidance as to what is meant by resident in New Zealand. For example it would be helpful to clarify: the treatment of short-term absences from New Zealand; the status of public sector employees who work overseas while in Government services and remain resident in New Zealand for income tax purposes for the duration of their absence (e.g. diplomats, university staff). At the moment only members of the armed forces are covered under section 9(1)(b) of the New Zealand Superannuation and Retirement Income Act 2001 as are some missionaries under section 10 but not others. I also believe there is merit establishing a statutory link between residency for income tax purposes under the Income Tax Act 2007 and residency under section 26.

3 - 3 - Under section YD 1 of the Income Tax Act 2007, once a person is resident in New Zealand for income tax purposes, to become a non-resident they must be personally absent from New Zealand for a period of at least 325 days in any 12 month period as well as not have a permanent place of abode in New Zealand. The latter requirement is also defined using common law principles and is a rigorous test which often results in individuals being resident in New Zealand for tax despite them not necessarily being present in New Zealand. It appears that the criteria for being resident in New Zealand are not too dissimilar to that of permanent place of abode for income tax purposes so why not link them together? If an individual is resident in New Zealand for income tax purposes, they pay tax on their worldwide income even in situations where they may be actually living outside New Zealand for a period of time. If they are so resident in New Zealand for tax purposes they will be paying the same amount of New Zealand tax as if they were living in New Zealand so there is no policy reason why they should be treated differently under general portability provisions for New Zealand Superannuation. My reading of the proposals as they stand a New Zealand diplomat would have difficulty obtaining payment of New Zealand Superannuation at full rates outside of New Zealand even though they would have been resident in New Zealand for tax purposes all of their working lives under section YD 1(7) of the Income Tax Act (3) Tax Status of Payments of New Zealand Superannuation Outside of New Zealand under section 26. Although not specifically mentioned in the Bill nor accompanying Explanatory Notes, if New Zealand Superannuation is paid outside New Zealand under either the general portability (50%) or Pacific Islands portability rules, it is paid free of New Zealand tax. I understand this exempt treatment will continue when the Bill is passed. If New Zealand Superannuation is paid to someone resident in New Zealand it is taxable. On equity and cost grounds I do not see why it should be paid free of New Zealand tax to someone living overseas. There are a number of overseas countries that do not tax foreign-sourced income at all, and in other countries that do, superannuitants may decide not to report it to foreign revenue authorities. Therefore superannuitants retiring overseas may receive more New Zealand Superannuation (after tax) than if they had remained in New Zealand. There is no good policy reason for this. The only possible barrier to New Zealand taxing New Zealand Superannuation paid to a superannuitant overseas is if they are resident in a country with which New Zealand has concluded a double taxation agreement (DTA). Under some of New Zealand s DTAs pensions can only be taxed in the country where the pensioner lives, not the country where the pension is paid from. 2 2 There is no consistency in the treatment of pensions under New Zealand s 35 DTAs. Under 11 of the DTAs (Fiji, Finland, France, Germany, Indonesia, Ireland, Malaysia, Philippines, Singapore, Sweden, US) New Zealand has the right to tax payments of New Zealand Superannuation. Under 14 DTAs (Australia, Austria, Chile, Czech Republic, Japan, Mexico, Norway, Poland, South Africa, Spain, Taiwan, Thailand, UAE, UK) New Zealand would be required to exempt from tax payments of New Zealand Superannuation. Under another 8 DTAs (Belgium, China, Denmark, India, Italy, Korea, Netherlands, Switzerland) New Zealand is required to exempt occupation pensions (paid in respect of past

4 - 4 - Therefore I submit that: Where New Zealand Superannuation is paid to an individual living in a country with which New Zealand has not concluded a DTA, it should be subject to a source withholding tax of 12.5%. Where New Zealand Superannuation is paid to an individual living in a country with which New Zealand has concluded a DTA (and that DTA precludes New Zealand from taxing pension payments) it should be paid a lower rate (reflecting a discount of 12.5%). Another advantage of imposing a withholding tax is that if New Zealand Superannuation is taxable offshore, the superannuitant will be able to claim a foreign tax credit and therefore New Zealand can share in the tax payable on that income at the expense of the foreign government. By not taxing New Zealand Superannuation when it is paid offshore, New Zealand may merely be conceding tax revenue to a foreign government with no resulting benefit to the superannuitant. Where a tax is fully creditable under a foreign tax credit mechanism, tax policy experts regard this tax as free revenue. New Zealand might as well collect it. Portability Pursuant to a Social Security Agreement The social security agreement with Australia is in need of urgent review despite it only being negotiated a few years ago. It is highly discriminatory and manifestly unfair to many New Zealanders who wish to retire in Australia. New Zealanders who have spent all their working lives here and who wish to retire to Australia (to join their children etc.) may end up receiving no pension at all or an abated one. This is to be contrasted to a Pacific Islander who retires in Pacific Islands or someone who retires to another country under the general portability rules who can receive New Zealand Superannuation at full rates. In the other direction, wealthy Australians can retire in New Zealand and receive full payment of New Zealand Superannuation totally at the expense of the New Zealand taxpayer without ever having contributed to the New Zealand tax base during their working lives. This also applies to New Zealanders who have worked for most of their working lives in Australia returning home with a large Australian private pension (which has been supported by generous Australian tax incentives) and collecting New Zealand Superannuation at full rates. The social security agreement with Australia has considerable fiscal risks to New Zealand and it should be reviewed at the earliest opportunity. Pacific Islands Portability The Pacific Islands portability rules are generous and favour a small part of New Zealand society at the expense of the rest. Pacific Islanders can receive full payment outside New Zealand after 20 years of residency here instead of the 45 years proposed for everyone else. There are also proposals to allow them to specially apply for New Zealand Superannuation from outside New Zealand. I believe that these should not proceed unless this change is available to all other applicants. employment ) which may not apply to New Zealand Superannuation since it is not employment based. The remaining 2 DTAs (Canada, Russia) would appear to give New Zealand partial taxing rights.

5 - 5 - I also question why Pacific Islanders from a number of French and US dependent territories are eligible for the special Pacific Islands portability when France and the US are much wealthier countries than New Zealand. These countries should take responsibility for their own citizens should they retire outside New Zealand and not receive a subsidy from the New Zealand taxpayer. The proposed changes to the general portability I believe present an excellent opportunity for New Zealand to review the special Pacific Islands portability and to bring them into line with the new general portability provisions proposed in the Bill.