How does KiwiSaver affect US tax?
How do you report it to the IRS?
As a US citizen living and working in New Zealand, it is vital that you remain compliant with your US tax obligations. US expats working overseas are subject to a number of informational filing requirements. Some of the more common forms that are required include:
- Form 8938 Statement of Specified Foreign Financial Assets
- Form 3520-A/3520 Foreign Trust/Pension and Gifts
- Form 5471 Foreign Corporation Ownership Reporting
- FBAR (Foreign Bank and Financial Account Report)
There is a lot of confusion around KiwiSavers and how they need to be reported to the IRS. The 2017 new Revenue Procedure (Rev. Proc.) has left many wondering if the KiwiSaver still needs to be disclosed.
Does a KiwiSaver need to be reported as a foreign trust?
The filing requirements and taxation varies significantly. However, KiwiSavers typically need to be reported as a foreign trust.
In the case of KiwiSavers, it is typically set up as a trust, where the employee makes contributions deducted from the salary and the employer is contributing a percentage in addition to this. In the KiwiSaver, those combined funds are put into an account and held by third party provider. They are being invested for a beneficiary and therefore are typically trusts.
What is a KiwiSaver?
It is a voluntary retirement fund under the New Zealand Government, if you are a New Zealand citizen, permanent resident or hold a residence class visa. If enrolled, you will contribute either 3%, 4%, 6%, 8% or 10% of your pay before taxes. If you don’t choose your own contribution rate, your employer will deduct the default rate of 3% from your wages.
Does the US have a Totalisation Agreement with New Zealand?
No. Those who are self-employed need to be aware of the risks of their self-employment income being subject to double taxation and mitigate with tax planning.
When do you have to do the foreign trust reporting on the US side?
Form 3520-A/3520 is used to report foreign trusts to the IRS. The Trustee of a foreign grantor trust has this annual filing requirement.
The Revenue Procedure tried to make things easier for reporting – in some circumstances you do not need to report your foreign retirement funds on Form 3520/3520-A. Unfortunately, KiwiSavers do not qualify under the Rev. Proc. from relief from filing. Although, if your KiwiSaver is a non-grantor employer trust then you are exempt from filing.
I want more information about KiwiSaver and IRS
How do I know whether my KiwiSaver is an employee-benefit trust or a grantor trust, or both?
Whether your KiwiSaver is an employee-benefit trust, a grantor trust, or both, depends on the amount of contributions going into the trust.
- When the employer contribution exceeds the employee contribution it is an employee-benefit trust and you typically do not have the 3520-A/3520 reporting requirements.
- If the employee contributions exceed the employer contributions, it is a foreign grantor trust with 3520-A/3520 foreign trust reporting requirements.
More often you will end up with a situation where the employee amounts exceed the employer amounts and therefore have a foreign grantor trust. Just remember to start off by looking at how much has been contributed into the KiwiSaver from yourself and your employer.
What if the contributions made by the employee and employer into the KiwiSaver are equal?
If your employer puts in more or an equal amount, you do not need to do extra foreign trust filing on the US side (3520-A/3520). But it needs to be bang on equal to not be considered a grantor trust. It can come down to a matter of cents, so make sure you are certain. If the individual employee is putting in more money than the employer even by a few cents, you will have foreign trust filing requirements.
If my KiwiSaver is an employee-benefit trust, do I need to report it to the IRS?
Under the Rev. Proc. 402 exception, those with employee-benefit (non-grantor trusts) are exempt from the 3520-A/3520 filing requirements, therefore saving money. This also means that although the employer contribution into the fund will be subject to US tax, the earnings within the fund would not be captured as they would in a grantor trust. However, this isn’t necessarily a good thing – even if the earnings are not picked up along the way, at the time of distribution they will be taxed. There’s no one set answer to what’s best.
Have a conversation with a tax professional to understand the best approach to your situation.
Are there any benefits to having a KiwiSaver?
So, you’ve avoided the foreign trust filing requirements, but is there any benefit to have this type of account if the contributions from the employer will always be equal to or less than your own?
Even if the employer contributions may not seem worth the filing, you are still better off globally from a tax point of view than you were when you started. New Zealand tax comes out more often at a higher tax rate than the US, so it is worthwhile to save on the New Zealand side by keeping money in the KiwiSaver. The amount you save from New Zealand tax could still outweigh the filings costs to the US. Your US tax compliance is effectively costing less than what you’re saving – it’s logical.
Will the KiwiSaver be treated as a PFIC?
The KiwiSaver fund can often be treated as a PFIC (Passive Foreign Investment Fund) for US tax purposes. PFICs can be tax disadvantageous with excess distributions of PFICs taxed at the highest marginal rate plus interest charge. PFICs also create additional filing requirements.
There are a number of different types of investments that can be made inside a KiwiSaver – a number of which can be New Zealand mutual funds. If the KiwiSaver is a mutual fund, then you would face PFIC treatment on the US side.
It is worth looking into what kind of investment you are making when you set up a saver fund and set up an investment that does not meet the definition of a PFIC.
What if I have a KiwiSaver and am late to filing Form 3520-A/3520?
Form 3520-A/3520 can often be missed when preparing US tax returns. In this situation, the penalties from the IRS can be extremely harsh.
However, the IRS currently provides a Streamlined Amnesty Programme for you to come clean and into US tax compliance, while avoiding the penalties. Under the Streamlined Amnesty Programme, tax professionals will go back and prepare your missing forms or amend your three most recent delinquent tax returns. You’ll also need to submit a Certification Statement with this that explains your late or absent filing was a result of non-willful conduct.
Under FACTA, information exchange between New Zealand’s IRD and the US’ IRS has advanced the IRS’ ability to identify unreported accounts. We recommend taking advantage of the Streamlined Amnesty Programme before it ends.