If you’re a US citizen, now is the hour to ensure that you are reporting your KiwiSaver funds correctly.

Firstly, let’s define what a KiwiSaver fund actually is.

A KiwiSaver fund is a voluntary retirement fund which may be set up by anyone including employees, through their workplace, self-employed individuals, or anyone else.

These funds are classed in New Zealand as Portfolio Investment Entities, (‘PIEs’) by way of which units are sold to subscribers. The fund itself pays the tax on behalf of the investor, at the investor’s Prescribed Investor Rate (‘PIR’). The PIR is determined by a subscriber to a PIE, from preset PIR rates determined by Inland Revenue, those rates based on the level of a taxpayer’s income.

Under New Zealand income tax legislation a PIE is a tax-efficient investment. For example, a taxpayer whose taxable income puts them in the top marginal income tax rate of 33%, only incurs a 28% tax rate on PIE investments, resulting in a 5% tax saving.

However, from a US tax perspective, reporting and taxation become extremely complex very quickly.

A KiwiSaver fund is frequently caught under the rules for Passive Foreign Investment Funds, (‘PFICs’) for US tax purposes.

Depending on how the fund was set up, and the nature of the underlying assets, reporting requirements and taxation vary significantly.

For example, the fund may be a 402(b) trust, or it may take the nature of a foreign trust, in which case forms 3520 and 3520-a should, as best practice, be filed.

If you have a KiwiSaver account now is the hour to review whether the fund and income are being reported correctly. This includes contributions, (especially those made by the government, the employee and the employer), growth, income and distributions.

The unrealized growth (built-in gains) in some KiwiSaver funds may be taxable as ordinary income at a rate of 39.6%. The double whammy is that there is no credit available for tax paid by the fund because the tax was not incurred by the subscriber to the fund.

With information exchange now occurring between the IRD and the US under FATCA, the IRS has dramatically advanced its ability to detect unreported accounts through matching Form 8938, upon which PFICs should be reported, with the income tax return.

We work with our clients and their wealth advisors to achieve tax-efficient strategies. It has never been more important to get the word out that KiwiSaver funds for US citizens present a serious exposure from a US tax perspective – not only through the punitive PFIC regime itself but for failure to comply if unreported.

Exposures include late payment interest and penalties, understatement of gross income penalties, possible criminal prosecution and imprisonment for willful failure to file required information and/or income tax returns.