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Taxation (Annual Rates and Budget Measures) Act 2011: KiwiSaver

KiwiSaver

Sections MK 4, RD 5, RD 65 to 67, RD 69, YA 1 and schedule 1 of the Income Tax Act 2007

The new legislation introduces changes to member tax credits (MTC) and the taxation of employer superannuation contributions.

Key features

  • The maximum amount of MTC has been reduced to $521.43 per year for the year ended 30 June 2012 and following years.
  • The rate at which the MTC is paid is reduced to 50c for each $1 contributed by individual KiwiSaver members (or members of complying superannuation funds), for the year ended 30 June 2012 and following years.
  • The exemption from employer's superannuation contribution tax (ESCT) for employer's superannuation cash contributions (up to 2 percent of salary and wages) to employees' KiwiSaver and complying superannuation fund accounts is removed from 1 April 2012.
  • ESCT deducted from employer's superannuation cash contributions to any superannuation fund (not just KiwiSaver funds) must be calculated at a rate equivalent to an employee's marginal tax rate from 1 April 2012. The current default deduction rate (a flat rate of 0.33) is removed.
Note  
An increase in the default and minimum employee contribution rate and the compulsory employer contribution rate (from 2% to 3%) were also announced in Budget 2011. These higher contribution rates do not take effect until 1 April 2013; this deferred application date meant it was not necessary, for implementation reasons, to include these changes in the Taxation (Annual Rates and Budget Measures) Act 2011. The necessary legislation will be included in a taxation bill scheduled to be introduced in September 2011.

Application dates

  • The reduced MTC maximum amount and MTC payment rate apply for MTCs paid for the year ended 30 June 2012 and following years.
  • The removal of the ESCT exemption and the calculation of ESCT at a rate equivalent to an employee's marginal tax rate applies from 1 April 2012.

Detailed analysis

Member tax credits

Member tax credits are designed to encourage regular saving by members into their KiwiSaver account, or complying superannuation fund.

MTCs are paid each year to eligible members until they are able to withdraw their savings. An eligible member must be aged 18 or over and they must have either a principal place of residence in New Zealand, or else be an overseas employee of the State services, or working overseas as a charity volunteer.

The MTC amount is calculated in relation to a member's credit contributions over an annual period, starting on 1 July each year. MTCs are claimed by, and paid to, KiwiSaver providers or complying superannuation funds on behalf of their members; claims are usually made by providers after 1 July each year for the preceding MTC year.

For the MTC year ended 30 June 2012 and for following MTC years:

  • The maximum amount of MTC paid per member is reduced to $521.43.
  • The rate at which the member tax credit is paid is reduced to 50c for each $1 contributed by members.
  • This means that in order to receive the maximum MTC of $521.43, a member will need to contribute $1,042.86 per year.

MTC claims relating to years ending on or before 30 June 2011 are not affected by these current changes. For these MTC years:

  • The maximum MTC amount payable for a year is $1,042.86.
  • The amount of MTC paid for the year is matched to member contributions for that year, dollar for dollar, up to the maximum MTC amount.

Employer superannuation contribution tax

Cash contributions made by an employer to a superannuation fund for the benefit of an employee are generally liable for employer superannuation contribution tax (ESCT).

ESCT is deducted from an employer's superannuation cash contribution.

Removal of exemption of KiwiSaver and complying superannuation funds

Compulsory employer contributions to KiwiSaver schemes and complying superannuation funds were previously exempted from ESCT.

This exemption is removed from 1 April 2012. ESCT will therefore need to be deducted on compulsory employer contributions to KiwiSaver and complying superannuation funds.

ESCT rate

The ESCT flat rate of 0.33 cent has been removed as a default rate. The removal of the default flat rate applies to employer's superannuation cash contributions made to all defined contribution superannuation funds, not just KiwiSaver funds.

ESCT must be deducted at an annual ESCT rate based on either:

  • the annual salary or wages plus gross employer contributions paid to the employee in the previous standard tax year (if the employee was employed for all of that year); or
  • an estimate of the total amount of salary or wages plus gross employer contributions that the employee will earn in the year ahead (where the employee was not employed for all of the previous tax year).

Employees and employers can still agree to treat the employer superannuation contribution as salary or wages, in which case the PAYE rules will apply instead.