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 has two sections: the Standard Section and the Locked Section. Both you and your employer can contribute to either section.
Standard Section: You can withdraw money from the Standard Section at any time without restrictions. This section is not eligible for any contributions from the government.
Locked Section: Withdrawals from the Locked Section are restricted. You need to meet certain criteria for early withdrawal, or you can withdraw at retirement. 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 their 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.
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 a foreign trust for U.S. tax purposes?
UniSaver is classified as a foreign trust for U.S. tax purposes and may require filing Form 3520 and Form 3520-A. The filing requirements depend on whether UniSaver is considered an employee's trust or a grantor trust:
Employee's Trust: If UniSaver is treated as an employee's trust, it is exempt from the trust filing requirements.
Grantor Trust: If UniSaver is treated as a grantor trust, you will need to file Form 3520 and Form 3520-A.
The necessity for filing arises only when your contributions to the account exceed your employer's contributions. In such a case, the portion attributable to your contributions will be treated as a grantor trust, requiring Form 3520 and Form 3520-A filing. If, at any time during the year, your total contributions are less than your employer's contributions, the entire portion will be treated as an employee's trust, and no trust filing will be required.
This distinction helps ensure compliance with U.S. tax laws and clarifies your filing obligations.
If you need further details or have other questions, feel free to ask!
Is a UniSaver account considered a tax-favored foreign retirement trust and exempt from trust reporting requirements under Rev. Proc. 2020-17?
No. UniSaver accounts are not tax-favored foreign retirement trusts under Rev. Proc. 2020-17. UniSaver 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.
UniSaver Scheme is 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. UniSaver scheme allows eligible individuals to make withdrawals from the standard section of the trust at any time without any restrictions.
U.S. Taxation of UniSaver
Here are some key points:
Employee / Personal Contributions
Contributions made by you as an employee, are not deductible for U.S. tax purposes.
Employer Contributions
Contributions made by your employer to your UniSaver account are taxable income for U.S. tax purposes.
Government Contributions
Contributions made by the 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 is not a Portfolio Investment Entity.
Tax / ESCT (Employer Superannuation Contribution Tax)
Tax and ESCT can be applied against your U.S. tax lability for credit purposes.
U.S. Tax Filing Requirements for UniSaver
FBAR - FinCEN Form 114
A UniSaver account is considered a foreign financial account for U.S. tax purposes, and it needs 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
A UniSaver account needs 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 UniSaver account, if the total value of those assets exceeds the applicable reporting threshold.
Form 3520 & 3520-A
New Zealand UniSaver scheme is considered a foreign trust for U.S. tax purposes. Therefore, if you own an interest in UniSaver scheme, you may need to file trust forms (Form 3520 and 3520-A) depending on whether the scheme is treated as an employee's trust or grantor trust.
These forms are used to:
- Report Your Transactions with the Trust: This includes any contributions to or distributions from the UniSaver 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 UniSaver scheme. There is no tax treaty between the U.S. and New Zealand regarding the treatment of NZ retirement income. Therefore, the UniSaver scheme is considered a non-qualified foreign retirement trust for U.S. tax purposes, and its 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 the UniSaver scheme. The UniSaver scheme generally does not make distributions to your account. The only occasions where you might realize a gain are when the UniSaver scheme 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.