Deductions from salaries and wages: Superannuation fund contributions
Taxing superannuation fund contributions
| Note | |
|---|---|
| Personal income tax rates have changed. For a summary of the changes see the News and updates article. | |
Any contribution an employer makes to a superannuation fund for the benefit of an employee is liable for tax.
What are specified superannuation contributions?
The term "specified superannuation contributions" has a specific meaning in this context. It covers any contribution to a superannuation fund paid by the employer for the employee's benefit (a superannuation fund is a scheme that has been registered under the Superannuation Schemes Act 1989). If an employee asks an employer to make deductions from their wages and pay them into a superannuation scheme, these are not specified superannuation contributions.
How to tax
Employer superannuation contribution tax (ESCT), formerly specified superannuation contribution withholding tax (SSCWT), can be taxed in one of the following ways:
- at a flat rate of 33 cents in the dollar
- at 39 cents in the dollar if the employer and employee agree to elect this rate (only employees who earn over $70,000 a year are likely to use this option)
- an optional ESCT rate based either on the annual salary or wages paid to the employee in the previous standard tax year (where the employee was employed for all of that year), or an estimate of the total amount of salary or wages that the employee will earn in the year ahead (where the employee was not employed for all of the previous tax year). This option is offered at the discretion of the employer.
Under this option the ESCT rate for contributions to 31 March 2007 ...
with salary and wages totalling ... were less than $9,500 15% more than $9,500 and not more than $38,000 21% over $38,000 33%
and the ESCT rate for contributions to 30 September 2008 ...
with salary and wages totalling ... were less than $11,400 15% more than $11,400 and not more than $45,600 21% over $45,600 33%
and the ESCT rate for contributions from 1 October 2008 ...
with salary and wages totalling ... will be ... less than $16,800 12.5% more than $16,800 and not more than $48,000 21% over $48,000 33%
- the employee's personal tax rate, by treating the contribution as part of the employee's salary or wages, with the agreement of both employer and employee.
Employer contributions exempt from ESCT
Employer contributions to KiwiSaver schemes and complying funds are exempt from employer superannuation contribution tax (ESCT), formerly specified superannuation contribution withholding tax (SSCWT).
The exemption applies to the lesser of:
- an amount equal to the employee's contribution, or
- 4% of the employee's gross salary or wages.
Any contributions over the exemption are subject to ESCT.
Maximising the exemption from ESCT
Employer superannuation contribution tax (ESCT) is payable on employer contributions to a registered superannuation scheme on behalf of an employee.
The Income Tax Act exempts employer contributions from ESCT if the contribution is paid to an employee's KiwiSaver scheme and does not exceed the cap provided. This creates an incentive to decrease salary in exchange for employer contributions - which will be tax free.
The cap
The cap:
- is the lesser of the employee's contribution or 4% of the employee's gross salary or wages
- is adjusted according to previously exempted amounts and how long the employer has been deducting KiwiSaver contributions from the employee's salary or wages
- applies to employer contributions made on a pay-by-pay basis as well as to lump sum payments to a member's KiwiSaver scheme.
To calculate whether an employer contribution is eligible for the exemption, employee contributions from the previous 12 months are taken into account. The cap applies on a rolling basis and is not tied to a particular year.
Complying funds
This exemption has been extended to complying funds. A complying fund is a section within a registered superannuation scheme that has incorporated certain KiwiSaver rules - in particular portability and lock-in. Further information can be found in the Tax Information Bulletin: Vol 19, No 1 (February 2007).
How to maximise
Maximising the value of the exemption from ESCT is achieved by multiplying current salary by:
- 0.0384615 (ie 1 - 1/1.04) for a 4% employer contribution
- 0.0196078 (ie 1 - 1/1.02)) for a 2% employer contribution
to determine the amount to be salary-sacrificed.
This is illustrated by the following examples:
Example 1 - where all of the employer contribution is tax free
| Employee's annual salary = | $100,000.00 |
| Salary multiplied by 0.0384615 = | $3,846.151 |
| New salary = | $96,153.85 |
| Employee contribution at 4% of new salary = | $3,846.15 |
| Tax benefit = | $1,499.942 |
| 1 4% employer contribution | |
| 2 Employer contribution $3,846 (ESCT is calculated on whole dollars) multiplied by employee's marginal tax rate 39%. | |
Example 2 - 2% employee and 2% employer contribution
| Employee's annual salary = | $40,000.00 |
| Salary multiplied by 0.0196078 = | $784.311 |
| New salary = | $39,215.69 |
| Employee contribution at 2% of new salary = | $784.31 |
| Tax benefit = | $258.722 |
| 1 2% employer contribution | |
| 2 Employer contribution $784 (ESCT is calculated on whole dollars) multiplied by employee's marginal tax rate of 33%. | |
Date published: 02 Oct 2008
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