NZ First KiwiSaver Policy - Tax Filing at Birth?

Over the weekend, we saw a policy announcement made by the New Zealand First

Party, with regards to the upcoming New Zealand election.

One of the policies announced, was the mandatory creation of KiwiSaver accounts for New Zealand citizen children at birth.

But, for those who also become US citizens at birth, how might this policy impact them?

US Tax Reporting of KiwiSaver

As many US citizens here in New Zealand now know, KiwiSaver can create a filing obligation in the United States.

This filing requirement isn’t based on age or KiwiSaver value, but rather the US citizen’s ownership share of the KiwiSaver.

This filing can come about as a form of foreign trust reporting, income reporting, and investment reporting. This of course varies by KiwiSaver account and the investments contained within.

However, the issue at hand here is that the existence of KiwiSaver trust reporting is not dependent on whether the US citizen child has any actual knowledge of the account, access to the account, or even involvement in its creation.

The practical issue here is that New Zealand First’s policy proposes mandatory account creation, rather than an optional opt-in system.

As a result, some US citizen children could potentially find themselves with annual US international reporting obligations before they are even old enough to attend school.

KiwiSaver Funds Held In New Zealand Trust

The issue at hand here arises due to the fact that under the KiwiSaver Act, funds are to be held in a New Zealand trust.

For example, when a person opens and contributes to a KiwiSaver scheme, the funds will generally be held in a trust named after the KiwiSaver provider.

Under the policy proposed by NZ First, the government would make an initial contribution of $1000, upon the opening of the KiwiSaver account.

Whilst of course it up for discussion as to whether the government contribution is attributable to the owner of the account for US tax purposes, it would be difficult to say that the funds belong to anyone other than the account owner.

Where a US tax filing requirement arises, is due to Sections 671 to 679 of the US tax code, which govern when a US person (ie a citizen, green card holder or otherwise resident person) may be considered a partial owner or grantor of a foreign trust.

Unfortunately, when a US person is treated as an owner of a foreign trust, a filing obligation may exist regardless of the person’s income level. It is important to obtain US tax advice when opening a KiwiSaver account.

US Tax Filing for Children’s Mandatory KiwiSaver?

The concern here is not necessarily that every US citizen child with a KiwiSaver will owe US tax.

In many cases, there may be little or no US tax payable at all.

Rather, the issue is that the United States tax system is heavily reporting-based

Generally speaking, when a US citizen is considered to be an owner/grantor (or partial owner) of a foreign trust, a US tax filing requirement now exists.

This applies regardless of the age of the US citizen, no exemption exists for minors whom are deemed owners of foreign trusts, even dependents of US citizens already filing.

In addition, there is no de minimis threshold for foreign grantor trust reporting, which means from the very first dollar that a US person holds in a foreign trust, we now have a filing obligation.

This can firstly create a filing obligation on Form 3520 & 3520-A for the KiwiSaver, but in addition income from the KiwiSaver (ie growth in a fund) can flow through to a full US tax return.

It is important to note at this stage, that there are varying opinions on KiwiSaver trust reporting and obtaining expert US tax advice to ensure that KiwiSaver compliance obligations are being effectively met.

Nevertheless, the mandatory KiwiSaver does create the risk that a US tax filing may exist from birth.

This would obviously place an unfair burden on US/NZ dual citizens, and hopefully an opt out would still exist.

Summary

Whilst KiwiSaver can indeed be very beneficial for US citizens in New Zealand, this can mostly be down to the employer contribution portion. Indeed, despite the filing complications of KiwiSaver, we do find that most of our clients choose to hold KiwiSaver, while taking steps to manage it well from a US tax perspective.

These benefits however are unlikely to exist for a KiwiSaver created for a US citizen newborn.

The NZ First policy of mandatory KiwiSaver from birth, creates the risk that US citizen children will have a US tax filing requirement from birth also.

If KiwiSaver is causing you US tax headaches or you’d like to discuss further, reach out to us for US tax advice – info@usatax.nz