Deductions from salaries and wages: Superannuation fund contributions
Taxing superannuation fund contributions
Any cash contribution an employer makes to a superannuation fund for the benefit of an employee is liable for tax.
What are superannuation contributions?
The term "superannuation contributions" has a specific meaning in this context. It covers any cash 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 or a KiwiSaver scheme registered under the KiwiSaver Act 2006).
If an employee asks an employer to make deductions from their wages and pay them into a superannuation scheme, these are not superannuation contributions.
How to tax
ESCT (employer superannuation contribution tax), formerly specified superannuation contribution withholding tax (SSCWT), can be taxed in either one of the following ways:
1. An optional ESCT rate based on either:
- the total salary or wages plus gross employer cash contributions paid to the employee in the previous standard tax year (1 April to 31 March), or
- when employees haven't worked for a full previous tax year an estimate of the total salary or wages plus gross employer cash contributions that the employees have received or will receive can be used.
| ESCT rate for contributions with salary and wages totalling ... | will be ... |
|---|---|
| $0 to $16,800 | 10.5% |
| $16,801 to $57,600 | 17.5% |
| $57,601 to $84,000 | 30% |
| $84,001 upwards | 33% |
2. Treat your employer cash contribution as salary or wages and taxed at the employee's personal tax rate (if the employer and the employee agree)
| Note |
|---|
| From 1 April 2012, employers paying into a defined benefit fund can choose to apply ESCT at the flat rate of 33 cents in the dollar. This calculation can't be used to calculate ESCT on contributions made to any other superannuation funds. |
ESCT must be paid to us along with PAYE deductions on the Employer deductions (IR345) form.
ESCT is not included on the Employer monthly schedule (IR348). The amount shown as total KiwiSaver employer contributions on the EMS is the net amount - the gross employer contribution less ESCT.
ESCT rate based on employee salary or wages
The ESCT rate is based on the employee's salary or wages plus gross superannuation employer cash contributions received in the previous standard tax year, ie, 1 April to 31 March. The tax rate is used for all employer superannuation cash contributions made in the current standard tax year.
There is no requirement to adjust the rate during an income year if an employee's salary or wages increase or decrease. If they do change during the year, affecting the applicable rate, a new rate will be set the following year based on this change.
ESCT is calculated on the whole dollar and is deducted from the gross employer cash contribution.
| Example |
|---|
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An employee has gross earnings of $392.40, gross KiwiSaver employer contribution (2%) of $7.84 and an ESCT rate of 17.5%. ESCT is applied to the whole dollar (ie, $7.00 in this example) $7.00 multiplied by 17.5% = $1.22 ESCT Deduct the ESCT from the gross employer contribution $7.84 minus $1.22 = $6.62 net employer contribution Net contributions of $6.62 are returned on the EMS and IR345 as employer contributions, $1.22 on IR345 as ESCT |
In some cases an employer may be "locked in" to an employment agreement where they contribute a set amount of their employee’s salary or wage. In these cases it may be necessary to gross up the employer cash contribution so the employee receives their full entitlement.
| Example |
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The employer has an agreement with his employee to pay a net amount of $100.00 to the employee's KiwiSaver scheme and the employee has an ESCT rate of 30%. Using the formula: ESCT = a divided by (1 minus a) multiplied by b a = ESCT rate (example 0.30 as 30%) b = employer contribution 0.30 divided by (1 minus 0.30) multiplied by $100 = $42.85 Net contribution of $100 is returned on the EMS and IR345 as KiwiSaver employer contributions, $42.85 on IR345 as ESCT |
An employer is required to make an ESCT deduction when making any specified superannuation cash contribution. If an employer doesn’t do this, the ESCT is worked out on the grossed-up amount of the employer’s superannuation cash contribution.
Taxing contributions at the employee's personal tax rate
If employers agree, employees can choose to have all or part of the value of the employer's superannuation cash contribution included in their gross salary and wages and taxed at their personal tax rates. Employees must understand that classifying this amount as salary and wages will affect their Working for Families Tax Credits, independent earner tax credit entitlements, the amount of child support they pay and their student loan repayments. However, they can change back at any time.
The actual employer cash contribution is paid into the superannuation fund - the employee doesn’t receive the contribution in the hand. The value of the employer cash contribution will be added to the employee’s gross wages for the pay period and taxed at the appropriate rate. The rate will depend on the employee’s tax code.
Contributions treated as salary and wages are subject to earners' levy (included in the PAYE tables). There are two ways of paying the employer cash contribution to the superannuation fund:
- the gross amount is paid; to the superannuation fund and the employee's net salary or wage is reduced by the amount of PAYE, or
- the net amount is paid to the superannuation fund after deducting the income tax component of the PAYE.
| Example | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Rachel is employed by Red Bottle Ltd. She belongs to KiwiSaver. Her employment agreement includes Red Bottle Ltd contributing $50 a week to her KiwiSaver scheme, in addition to her normal weekly salary of $500. Rachel chooses to have these contributions included as part of her salary and her employer agrees. This means Red Bottle Ltd uses the total of her salary and the employer contributions of $550 to calculate her PAYE.
Red Bottle Ltd shows this on the Employer monthly schedule (IR348) as: Gross earnings $550.00 KiwiSaver employer contributions (Box 7) $50.00
Red Bottle Ltd enters the information on the Employer monthly schedule (IR348) as: Gross earnings $550.00 KiwiSaver employer contributions (Box 7) $41.25 Note: Net refers to tax, not PAYE. The earners' premium must be removed before the tax is deducted from the gross employer contribution. |
Refunding ESCT
If an employee opts out by completing an Employee opt-out request (KS10), the employer is refunded all compulsory, non-compulsory cash contributions and any tax calculated on employer cash contributions for that employee.
Any tax, calculated on employer cash contributions, paid to us for your employee that has opted out will be refunded to you on request. You can do this by either:
- completing an IR344 or
- calling us on 0800 377 772
Employer contributions exempt from ESCT
From 1 April 2009 to 31 March 2012 compulsory employer contributions were exempt from ESCT so long as it did not exceed the threshold provided.
Date published: 05 Apr 2012
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