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Deductions from salaries and wages: Superannuation fund contributions

Taxing superannuation fund contributions

All employer superannuation cash contributions (employer contributions) paid to a superannuation fund, including KiwiSaver schemes and complying funds, for the benefit of an employee are liable for ESCT (employer's superannuation contribution tax). The exception to this is if the employee and employer have agreed to treat some or all of the employer contribution as salary or wages under the PAYE rules.

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.

What are employer superannuation cash contributions?

The term "employer superannuation cash contributions" 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.

If an employee asks an employer to make deductions from their wages and pay them into a superannuation scheme, these are not employer contributions.

There are two options for calculating and withholding tax on employer contributions:

  1. If the employer and employee agree, the amount of employer contribution can be treated as the employee's salary or wages and PAYE must be withheld.
  2. In all other cases, ESCT (employer superannuation contribution tax) must be withheld. ESCT is calculated at a rate based on the employee's total annual salary or wages plus gross employer contributions for the previous tax year (1 April to 31 March). When employees haven't worked for the employer for the full previous tax year, the rate is based on the employer's estimate of the employee's total salary or wages plus gross employer contributions they will receive in the tax year for which the ESCT is being calculated.
Employee's salary or wage income for year ended 31 March
(including gross superannuation employer contributions)
ESCT from 1 April
$0 to $16,800 10.5%
$16,801 to $57,600 17.5%
$57,601 to $84,000 30%
$84,001 upwards 33%

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ESCT rate based on employee salary or wages

The ESCT rate is based on the employee's salary or wages plus gross employer contributions paid for the employee in the previous tax year, ie, 1 April to 31 March. The tax rate is used for all employer contributions made in the current tax year.

Employee worked for the full previous tax year

Read an example of the ESCT rate where the employee worked for the full previous tax year

Employee did not work for the full previous tax year

Where the employee didn't work for the employer for the full previous tax year (1 April to 31 March), the employer must estimate the amount of salary or wages plus gross employer contributions that will be received by the employee in the year the ESCT is being calculated. The ESCT rate is then based on that estimate.

Read an example of the ESCT rate where the employee did not work for the full previous tax year

Note  
As the employee started part way through the current tax year, the employer must make a second estimation of the employee's earnings as the basis for the ESCT rate at the beginning of the following tax year (1 April 2014 to 31 March 2015).

ESCT is calculated on the whole dollar and is deducted from the gross employer contribution.

Read an example of ESCT rates calculated on the whole dollar

There is no requirement to adjust the rate during the tax 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.

Read an example showing when ESCT is deducted from the employer contribution

In some cases an employer may be "locked-in" to an employment agreement where they contribute a set percentage of their employee's salary. In these cases it may be necessary to gross up the employer contribution so the employee receives their full entitlement. Calculate the tax using this formula:

ESCT = a divided by (1 minus a) multiplied by b

Where:

  • a is the rate of ESCT, and
  • b is the actual amount paid to the fund.

Read an example showing when ESCT is paid on top of the employer contribution

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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 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
  • their 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 contribution is paid into the superannuation fund - the employee doesn't receive the contribution in the hand. The value of the employer contribution will be added to the employee's gross wages for the pay period and taxed at the appropriate rate using the PAYE tables. The rate will depend on the employee's tax code.

Contributions treated as salary and wages are subject to earner's levy (included in the PAYE tables).

There are two ways of paying the employer cash contribution to the superannuation fund:

  1. 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
  2. the net amount is paid to the superannuation fund after deducting the income tax component of the PAYE.

Read and example of employer contributions being taxed under the PAYE rules

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Refunding ESCT

If an employee opts out by completing an Employee opt-out request (KS10) form, the employer is refunded all compulsory, non-compulsory contributions and any tax calculated on employer contributions for that employee.

Any tax, calculated on employer 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 and 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.

Find out more about ESCT liability for KiwiSaver deductions and contributions from 1 April 2009 to 31 March 2012

 

 


Date published: 15 Jul 2013

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