New Zealand children born to parents who are citizens of the United States face a difficult KiwiSaver choice: Give up your US citizenship, or face a KiwiSaver tax compliance bill of $750 or more a year courtesy of the US taxman.
A petition has been started at Parliament asking MPs to change the KiwiSaver Act to allow people with KiwiSaver accounts facing the unreasonable demands from US tax authorities to close their KiwiSaver accounts.
The issue surfaced as a result of the plight of Auckland dual national Kira Bacal and her four New Zealand-born children, Harper, 13, Rowan, 10 and twins Malachi and Elias, 8.
Bacal said she signed her children up to KiwiSaver, but found that had entangled them in a net of US tax authority red tape requiring extensive tax filings every year. The filings were so complex only an accountant could prepare them.
Bacal said she tried to shut her children’s KiwiSaver accounts at KiwiSaver provider Juno, only to find the KiwiSaver Act does not permit that.
Once open, a KiwiSaver account can be closed in only limited circumstances: When the account holder dies or permanently emigrates.
“Although the children were born here, they, like me, are dual nationals of New Zealand and the USA, and have tax obligations to both countries,” Bacal said.
She blamed the US for imposing a punitive tax reporting process to discourage foreign investments in favour of domestic ones, but said she was also annoyed there was no warning when she opened the accounts, despite the application forms asking for the applicants’ nationality details.
“This will cost me $2000 per child, per year, for the required reporting. This is separate to any actual tax that is due. This is just what it costs to fill out the extremely, and deliberately, confusing forms,” Bacal said.
Failure to file can result in a penalty of US$10,000 (NZ$17,600) a year.
“I begged the Inland Revenue to allow the accounts to be closed, but this appeal for an exemption was rejected,” she said.
“I am trying to be a good citizen of both countries. As a single parent, we do not have a huge amount of disposable income under the best circumstances,” she said.
“I appreciate that like many other savings and retirement accounts, KiwiSaver is designed to prevent early withdrawal of funds, but surely it was never intended to force a family into financial hardship either.”
Her accountant David Tzimenakis, from US Global Tax, said KiwiSaver could work for some dual New Zealand/US citizens living their lives in New Zealand, but “it comes with quite a lot of hooks attached”.
US citizens were treated by the US tax authority (IRS) as US residents for tax purposes, no matter where they lived in the world, Tzimenakis said.
The fishhooks included many hours of an accountant’s time to prepare the reporting, he said
“This system was designed to be difficult, it was designed to be complex. Even the IRS estimates are that 32 hours of preparation time per form is required. Now, it doesn’t take us anywhere near that long, but it was designed to be hard,” he said.
Preparation fees could vary from $250 to $5000 a year, he said.
“It’s not fair on US citizens,” he said.
The result has been a growing number of New Zealand/US dual citizens, of which there may be more than 40,000, according to Tzimenakis, renouncing their American citizenship.
“I used to deal with three to four renunciations a year, now it’s closer to 100 every single year,” Tzimenakis said. “A great many of them do it through gritted teeth.”
It created a loss of identity, and limited their freedom.
“It’s an awful thing to do,” he said.
But there was “an easy fix to this.”
Tzimenakis said he had been in contact with government ministers, but had no luck in persuading them to act.
So he started a petition to Parliament to ask MPs to change the KiwiSaver Act to allow dual New Zealand/US citizens to close their accounts.
A petition to Parliament triggers a select committee inquiry process, including the gathering of evidence, followed by a report, which can eventually lead to law change.
Commerce and Consumer Affairs Minister David Clark said that while he appreciated the difficult situation the Bacals were in, the government had no plans to change KiwiSaver settings based on US tax requirements.
* This story originally appeared on Stuff.