Kiwisavers – A Tax Intro for US Expats in New Zealand
US citizens living in New Zealand, like US expats around the globe, are in the unique position of being subject to potential tax and reporting obligations both in New Zealand, the local country of residence, and in the United States. This is true with respect to income, assets, entities and activities, which can make the tax profile of a US citizen living in New Zealand more complex than the average taxpayer.
A good example of this in the case of New Zealanders is the kiwisaver, a common financial tool used for long-term savings. In this blog, we focus on the various approaches taken by US tax practitioners with respect to the US tax and reporting obligations associated with kiwisavers.
Kiwisavers and US Tax Considerations
As a very general background, the purpose of the kiwisaver scheme is to encourage long-term savings, particularly for retirement. You are generally enrolled in the scheme by your employer unless you opt out, however you do not need to be an employee to have a kiwisaver fund. Kiwisaver contributions can be accessed without penalty upon the occurrence of certain events (e.g., reaching retirement age, financial hardship, purchasing a first home). Funds in a kiwisaver are not considered assets owned by the Kiwisaver provider. Rather, the provider’s role is to increase the value of your assets.
The US tax implications of owning a kiwisaver first depend on an assessment of the nature of the scheme. According to some, despite having tax-advantaged status in New Zealand, a KiwiSaver should be viewed as a “wrapper” that has no entity status for US tax purposes. In such case, an investment by the kiwisaver would be viewed as a direct investment by the plan owner, subjecting the earnings of the plan to current US taxation. If such an investment, for instance, were classified as a passive foreign investment company (“PFIC”) for US tax purposes (likely in the case of a mutual fund), this could be particularly tax disadvantageous as, absent certain elections, so-called “excess” distributions and dispositions of PFICs are taxed at the highest marginal rate with an additional interest charge.
According to others, a kiwisaver is more in the nature of a foreign trust, a classification that comes with its own set of complexities. In brief, if a kiwisaver were classified as a so-called “non-grantor” foreign trust, then earnings in the fund would not be taxable until distributed to the plan owner. If, instead, the kiwisaver were classified as a so-called “grantor” trust, it would essentially be viewed as transparent, with the tax implications being similar to those under the above “wrapper” interpretation.
Kiwisavers and US International Tax Forms
The US tax reporting obligations associated with kiwisavers are generally a fallout of the above discussion of the substantive tax implications.
Under the wrapper interpretation, additional tax reporting may be required depending on the underlying investments. In the case of a PFIC investment, for instance, a Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) would generally be required.
Under the trust (non-grantor) interpretation, a Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) would presumably be required upon a distribution from the kiwisaver fund to the owner. Under the trust (grantor) interpretation, both a Form 3520 and Form 3520-A (Annual Information Return of Foreign Trust with a US Owner) would presumably be required on an annual basis.
Aside from the above entity-related tax reporting obligations, kiwisavers should be reported both on the FBAR and on the Form 8938 (FATCA form), assuming the individual meets the thresholds that trigger the obligation to file one or both forms.
