The Guardians is committed to best practice, openness and transparency. Its policies are designed to ensure the correct amount of tax is paid in all jurisdictions in compliance with tax law and practice. All unusual and material tax issues are signed off by professional tax advisors and, if appropriate, by relevant tax authorities.
It has a co-operative compliance agreement with the New Zealand Inland Revenue Department (IRD). Under this agreement, tax positions are disclosed before the Fund’s tax return is filed, including the tax treatment of new investments. This provides real-time engagement with the IRD and certainty around its tax position. The Guardians endorses and operates in accordance with the OECD's Business and Industry Advisory Committee (BIAC) Statement of Tax Principles for International Business.
The Guardians measures the Fund’s performance on a pre-New Zealand tax/post-foreign tax basis. The Guardians regards New Zealand tax paid by the Fund as effectively a return to the Government.
The Guardians disclose the amount of tax paid by the Fund each year in the Annual Report.
The New Zealand Superannuation Fund is a pool of assets owned by the Crown, but under its founding legislation it is treated the same way as a company and is taxed at the 28% corporate tax rate.
However, its tax bill changes significantly from year to year. The volatility of the Fund’s income tax expense is largely driven by differences between the accounting treatment and income tax treatment of equity investments. Dividends received, realised gains or losses resulting from sales or reorganisations, and unrealised gains/losses resulting from changes in an equity’s market value are all taken into account when determining the accounting income from equity investments.
For tax purposes, however, the Fund’s New Zealand equities and most of its listed Australian equities are generally only subject to tax on the actual dividends received, while realised gains/losses and unrealised movements are not taxed.
New Zealand tax on other foreign equities is calculated under the Fair Dividend Rate (FDR) regime. The Fund is deemed to receive a deemed or notional dividend of 5% per annum of the market value of these equities. This amount is treated as taxable income while actual dividends, realised gains and losses and unrealised movements are not subject to tax.
A large portion of the Fund is taxed on this basis, so its effective tax rate is susceptible to global market conditions.
In years where the Fund records an accounting loss on its equities, it will still have deemed income for tax purposes based on actual or deemed FDR dividends. The opposite will be true in the case of a strong market, when accounting profits exceed taxable income.
Taxable income (or losses) from the Fund’s other investments, such as bonds, cash deposits, and derivatives, generally mirrors the accounting income and is subject to 28% tax.
Sometimes tax laws specify different timing than accounting rules. For example, some items included in tax expense are reversed out of the current tax return and recorded in deferred tax.
An example of deferred tax is the investment in Kaingaroa Forest, the Fund’s largest directly-held asset. For accounting purposes the forest investment is revalued regularly. But forestry assets are taxable on a realised basis, when harvested or sold. Therefore, the Fund carries a large deferred tax liability for the forest which will come home as it is harvested.