U.S. Tax Treatment of New Zealand UniSaver Scheme
Frequently Asked Questions
What is UniSaver?
UniSaver New Zealand is a registered superannuation scheme sponsored by employers. Established on March 1, 1993, it is open to permanent and eligible fixed-term employees of participating New Zealand universities.
UniSaver Limited is the trustee and manager of UniSaver New Zealand.
UniSaver is a defined contribution superannuation scheme, which means that the benefits are determined by the contributions made and the investment returns received, after deducting fees, expenses, and taxes.
UniSaver also features a complying superannuation fund section, known as the locked section. This section offers government contributions similar to KiwiSaver, but with stricter contribution and withdrawal requirements. Fixed-term employees are only eligible to participate in the locked section.
Is UniSaver an employer-sponsored retirement scheme?
Yes, UniSaver is a workplace savings scheme designed to help employees save for your retirement.
Who can join a UniSaver scheme?
Only employees of participating universities and certain other employers (participating employers) may become members.
To join the locked section, you need to be:
aged 18 or over, and
a New Zealand citizen or entitled to live in New Zealand indefinitely.
Can a non-salary or wage earner join UniSaver?
No
What are the contribution limits to UniSaver scheme?
Your required contribution to UniSaver depends on your membership category, generally ranging from a minimum of 3% to 4% of your salary. There is no upper limit.
Most members are eligible for an employer subsidy, provided their employer isn't contributing to another superannuation scheme on their behalf. If you qualify, your employer will typically contribute $1.35 (before tax) for every $1 you contribute. To receive the maximum employer subsidy of 6.75% (before tax) of your salary, you need to contribute 5% of your salary.
If you don't qualify for an employer subsidy, you can still join UniSaver. By participating in the locked section, you may qualify for compulsory employer contributions, which are currently set at 3%.
Is UniSaver scheme eligible for government contributions?
Yes, the locked section offers government contributions up to $521.43 a year in exchange for locking in contributions in the same way as KiwiSaver.
Contributions to the standard section don’t qualify for government contributions.
When can a participant withdraw money from UniSaver scheme?
Withdrawals from UniSaver are generally restricted to ensure the scheme fulfills its purpose of helping you save for retirement. Typically, you can access your funds upon retirement from age 60 or upon resignation. However, in certain limited circumstances, early withdrawals might be possible.
The locked section of UniSaver is a complying superannuation fund, meaning it adheres to specific rules similar to those of KiwiSaver, thus offering some KiwiSaver benefits. Different rules apply to the locked amounts held by members of the locked section.
In the event of your death, your savings in UniSaver will be payable to your personal representatives.
How do your contributions to UniSaver grow?
UniSaver operates as a managed investment scheme. Employees' contributions are pooled together and invested in various assets. All contributions are divided into units when they are paid into your member accounts.
UniSaver Limited manages these investments and charges a fee for their services.
The returns you receive depend on the investment decisions made by UniSaver Limited and its investment manager, as well as the performance of the chosen investments. The value of these investments can fluctuate, meaning they may increase or decrease over time.
How is UniSaver income taxed in New Zealand?
Employer contributions are subject to employer superannuation contribution tax (ESCT).
Tax is paid within UniSaver on taxable investment income derived by UniSaver.
You don’t need to pay tax on any benefit paid from UniSaver.
Is UniSaver scheme considered foreign trust for U.S. tax purposes?
Yes, they are considered foreign trusts for U.S. tax purposes, and they need to be reported on Form 3520 and 3520-A.
Is UniSaver account considered tax-favored foreign retirement trust and exempt from trust reporting requirement under Rev. Proc. 2020-17?
No. KiwiSaver accounts are not tax-favored foreign retirement trusts under Rev. Proc. 2020-17. KiwiSaver accounts do not satisfy all the conditions specified in the Rev. Proc. 2020-17 that a foreign retirement trust should satisfy to be considered a tax-favored foreign retirement trust. Tax-favored foreign retirement trusts are exempt from trust reporting requirements such as Form 3520 and 3520-A.
A tax-favored retirement trust is a foreign trust for U.S. tax purposes that operates exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits and that meets the following requirements established by the laws of the foreign jurisdiction:
1. Exempt from income tax or is otherwise tax-favored in the trust’s jurisdiction,
2. Annual information reporting is provided or available in the trust’s jurisdiction,
3. Only contributions with respect to income earned from the performance of personal services are permitted,
4. Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust or are subject to a lifetime limit of $1,000,000 or less to the trust.
5. Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties are applicable,
6. Employer-maintained trusts must be non-discriminatory and provide significant benefits for a substantial majority of eligible employees.
KiwiSaver Schemes are not considered tax-favored retirement trust because of the following two reasons.
1. The domestic law of New Zealand allows contributions over the limits set in Rev. Proc. 2020-17 even if the eligible individual does not exceed the contribution limits.
2. KiwiSaver schemes allow eligible individuals to make contributions to the trust that are not with respect to income earned for the performance of personal services.
Is UniSaver scheme considered a treaty-qualified retirement plan? If so, does this exempt U.S. persons from foreign trust reporting requirements?
Yes, KiwiSaver schemes are treaty-qualified retirement plans. Therefore, they do not need to register with the IRS and do not have any FATCA due diligence or reporting obligations. However, this exemption applies only at the entity level. Individual taxpayers are still subject to FATCA obligations and need to report their interests in KiwiSaver schemes on forms such as FBAR, 8938, 8621, 3520, and 3520-A.
A “Treaty Qualified Retirement Fund” is defined as being any pension fund established in New Zealand and described in Article 3(1)(l) (General Definitions) of the U.S./New Zealand Convention, provided that the pension fund is entitled to benefits under the Convention on income that it derives from sources within the U.S. (or would be entitled to such benefits if it derived any such income) as a resident of New Zealand that satisfies any applicable limitation on benefits requirement.
U.S. Taxation of UniSaver
Here are some key points:
Employee / Personal Contributions
Contributions made by you as an employee, self-employed or non-income earner are not deductible for U.S. tax purposes.
Employer Contributions
Contributions made by your employer to your KiwiSaver are taxable income for U.S. tax purposes.
Government Contributions
Contributions made by New Zealand Government to your KiwiSaver are taxable income for U.S. tax purposes.
Investment Growth
Invesment growth within the scheme is currently taxable in the U.S.
Investment Loss
Investment loss is not deductible for U.S. tax purposes, but they will be considered for calculating your tax basis in the scheme at the time of calculating the investment gain.
Membership Fees / Annual Fees
They are not deductible for U.S. tax purposes.
PIE Income
UniSaver ins not a Portfolio Investment Entity
Tax / ESCT (Employer Superannuation Contribution Tax)
PIE tax and ESCT can be applied against the U.S. tax lability for credit purposes.
U.S. Tax Filing Requirements for UniSaver
FBAR - FinCEN Form 114
KiwiSaver accounts are considered foreign financial assets for U.S. tax purposes, and they need to be reported on the FBAR (Foreign Bank Account Report) if a U.S. citizen or resident alien meets the filing threshold.
A U.S. person must file an FBAR if they have a financial interest in or signature or other authority over any financial account(s) outside the U.S., and the aggregate amount of the highest balances in all the accounts exceeds $10,000 at any time during the calendar year.
Form 8938
KiwiSaver accounts need to be reported on Form 8938 if you are a U.S. citizen or resident alien and meet the reporting threshold.
Form 8938, also known as the Statement of Specified Foreign Financial Assets, is used to report foreign financial assets, including foreign retirement accounts like KiwiSaver accounts, if the total value of those assets exceeds the applicable reporting threshold.
Form 3520 & 3520-A
New Zealand KiwiSaver schemes are considered foreign trusts for U.S. tax purposes. Therefore, if you own an interest in KiwiSaver schemes, you generally need to file trust forms (Form 3520 and 3520-A).
These forms are used to:
- Report Your Transactions with the Trust: This includes any contributions to or distributions from the KiwiSaver account.
- Report the Trust's Income and Expenses: Provide details on the income earned by the trust and the expenses it incurs.
- Report the Trust's Assets and Liabilities: Detail the trust's assets and liabilities to provide a complete financial picture.
Filing these forms ensures compliance with U.S. tax regulations and keeps the IRS informed about your involvement with the foreign trust and its financial activities.
Form 8621
According to U.S. tax law, a shareholder who is a member or beneficiary of a plan, trust, scheme, or other arrangement treated as a foreign pension fund (or equivalent) under an income tax treaty to which the United States is a party, and that owns an interest in a PFIC, is not required to file Form 8621 if, according to the applicable income tax treaty, the income earned by the foreign pension fund is taxed as the shareholder's income only when and to the extent that it is paid to, or for the benefit of, the shareholder. This means that if the income from the foreign pension fund is only taxed when it is distributed to the shareholder, and not before, the requirement to file Form 8621 for the PFIC interest does not apply.
But this is not the case with NZ KiwiSaver schemes. There is no tax treaty between the U.S. and New Zealand regarding the treatment of NZ retirement income. Therefore, NZ KiwiSaver schemes are considered non-qualified foreign retirement plans for U.S. tax purposes, and their income is currently taxable to U.S. taxpayers and cannot be tax-deferred.
However, there is another provision in the US tax law that states that a United States person who is considered to own an interest in a PFIC because they are a beneficiary of a trust that owns, directly or indirectly, stock in a PFIC, and who has not made an election under section 1295 or 1296 with respect to the PFIC, is not required to file Form 8621 if, during the beneficiary's taxable year, the beneficiary does not receive an excess distribution or recognize gain that is treated as an excess distribution with respect to the stock. This means that if the beneficiary doesn't receive an excess distribution or recognize gain treated as such during the taxable year, the filing requirement for Form 8621 does not apply.
Based on the above, in most cases, you will not need to file Form 8621 for the underlying investments in a KiwiSaver scheme. KiwiSaver providers generally do not make distributions to your account. The only occasions where you might realize a gain are when your KiwiSaver provider deducts membership fees or when you switch your funds. However, you need to determine if you generate a gain from these transactions to assess your Form 8621 filing requirement. If you do not recognize a gain, there will be no 8621 filing requirement in most cases. Therefore, it is essential to consult with your tax professional to determine your filing obligations.