In July the Inland Revenue released a proposal that would see a percentage of each fund transferred into New Zealand treated as taxable income based on a sliding scale of how long the owner of the funds had lived in New Zealand at the time of transfer.

In their recent paper Foreign superannuation schemes - Proposed changes a step in the right direction, Ian Fay and KirstyHallett of Deloitte examined the proposal and found that while it will simplify the situation considerably, it also presents some potential problems.

Change is needed because the current rules for taxing interests in foreign superannuation schemes are "complex", they said.

"They require the consideration of the FIF (Foreign Investment Fund) regime, the trust regime and the dividend rules. 

"Depending on the legal form of each investment, taxpayers with an interest in a foreign superannuation scheme can end up applying significantly different tax treatment to their interests.

"Given the complexity of the rules there is a lack of awareness and confusion regarding how the rules apply resulting in a significant degree of non-compliance and inconsistent application of the rules."

However, the authors raised some concerns about the proposal, including the lack of any mechanism to recognise the capital contribution to the scheme (from after-tax wages); they said there should be an option introduced to ensure taxpayers only paid tax on investment gains.

They said thought should be given to capping the rate at which people pay tax on foreign pension schemes to align with New Zealand savings vehicles, most of which are PIEs (Portfolio Investment Entities) and have a maximum tax rate of 28% for investment gains.

The transitional period would be "fraught with issues", they said, pointing in particular to the retrospective application of the rules and saying they should instead apply from April next year.

"The retrospective application of the proposed new rules causes concern and not only because it is incredibly poor from a policy perspective to apply a rule change retrospectively."