As many New Zealand based US persons know, KiwiSaver can create complex US tax headaches. However, new regulation is on the horizon, but does it spell the end of KiwiSaver trust reporting?
Background
The US has complex rules regarding foreign trusts, mostly contained in section 679 of the US tax code.
This section of the code determines when a US citizen is deemed to have become an owner of a foreign trust, and at which point the foreign trust becomes reportable to the IRS.
In most cases, any time a US person makes any transfer to a foreign trust, it becomes a foreign grantor trust, with the US person now being treated as an owner of their portion of the trust.
The end implication of this, is that any income generated on their portion of the trust, becomes reportable on an annual basis (almost no different to if the income has been earned in their own name).
Now, you might be thinking, wasn’t this article about KiwiSaver?
Well, all of the above relates to KiwiSaver, due to the fact that KiwiSaver funds are held in trusts.
Whilst a little more complicated, with significant further reading needed to fully explain the issue, the summary is that many US persons who contribute to KiwiSaver ultimately become treated as owners of the KiwiSaver trust for US tax purposes and as a result, need to file foreign trust reporting with their US tax return each year.
This reporting occurs on Form 3520 and 3520-A, which can be both costly, time consuming, and impact the efficiency of KiwiSaver as an investment vehicle for US citizens.
Its important to note that KiwiSaver trust reporting is only needed in certain circumstances, and professional advice should be sought when making this determination.
Does the IRS really want US citizens to be reporting their KiwiSaver?
As per current regulation, yes, however the IRS have taken steps in recent years to try and reduce the reporting needed for US citizens with foreign retirement plans.
The first ray of light was in 2020, when the IRS released Revenue Procedure 2020-17.
The intention of this new procedure, was to limit the circumstances in which a foreign retirement trust needs to be reported to the IRS.
Ultimately, this regulation failed in its intention, and attached a long series of conditions which a foreign retirement plan needs to meet, in order to be excluded from future reporting.
These included conditions that the foreign plan has contribution limits, amongst other requirements.
Of course, KiwiSaver has no contribution limits, nor do most Australian based retirement schemes.
The unfortunately result, was that due to the conditions placed on what qualifies for the reporting exception, most retirement schemes (worldwide) continued to need reporting to the IRS each year.
Proposed new code section § 1.6048-5 (b) – Light at the end of the tunnel?
On 7th May 2024, the IRS issued a proposed new set of regulations regarding the reporting of foreign trusts.
Whilst the code changes mostly relate to loans from foreign trusts (and when they would be treated as taxable income), an expanded exception for foreign retirement trusts exists.
As previously, this is intended to exclude certain foreign retirement trusts (such as KiwiSaver) from US tax reporting.
Despite this being another attempt by the IRS to reduce the reporting obligations of US citizens with foreign retirement schemes such as KiwiSaver, the conditions again are too narrow for KiwiSaver to be excluded.
A number of conditions exist in the proposed new rule, requiring a foreign retirement trust to:
- Only allow contributions as a result of work
- An annual limit to contributions
- A lifetime limit to contributions
As many of us are aware, KiwiSaver meets none of these requirements.
So, unfortunately, KiwiSaver will still need to be reported annually on Form 3520 and 3520-A.
The US Tax Team New Zealand will be making a submission to the IRS during the comments period, requesting that the conditions are expanded to include accounts which can be contributed to by non-working individuals, and to remove the contribution limit requirements.
Until we see any further expansion of these reporting exclusions however, we do continue with the current system of reporting KiwiSaver to the IRS each year.
If you have any questions, would like to discuss, or would like to arrange a tax advice appointment, contact us today at info@usatax.nz.