KiwiSaver schemes and tax
We do not provide Tax Advice. The following has been collected for your information only. We suggest that if you have any specific Tax questions that you contact your accountant.
The tax treatment for KiwiSaver schemes
All default KiwiSaver schemes must be structured as Portfolio Investment Entities ('PIEs') for tax purposes. Most other KiwiSaver schemes will elect to be PIEs. This means that tax will be paid by the fund on its investment income less expenses, on the member's behalf. Taxable income means income from all sources after taking into account deductions and losses. This is the final taxable amount on which you would pay NZ tax if you were to file a NZ tax return.
The Government has made some changes to the Prescribed Investor Rates - PIR. (the tax rates applied to KiwiSaver plans and some other investments).
Your KiwiSaver provider will be sending you more information about PIR. Also you can always contact the IRD. Here is a link to the latest IRD rates.
Budget 2011 changes:
The Government are halving the up to $20 per week ($1043 pa) matching government contribution tax credit of $1 to 50c or up to $521 for the year ending 30 June 2012 and beyond.
From 1 April 2013 the minimum employee and employer contribution will rise from 2% to 3%.
From 1 April 2012 all employer contributions will be subject to Employer Superannuation Contribution Tax (ESCT) at the employees marginal tax rate. Information about ESCT can be found at www.ird.govt.nz
Savers also benefit from new company tax rate
People who save through managed funds such as unit trusts and most superannuation and group investment funds will also benefit from the new company tax rate.
As a complementary measure, the top tax rate on investment income earned on behalf of individuals who invest in managed funds, that choose to use the new portfolio investment entity tax rules, will also reduce.
Less tax paid on income from these savings vehicles will mean faster accumulation of savings by individuals.
It works like this:
•The tax rate for unit trusts and group investment funds taxed as companies will change to the new, lower company tax rate of 30 per cent.
•People who invest in life insurance savings products will have tax paid on their behalf by life insurers at the rate of 30 per cent.
•Widely held superannuation funds and widely held group investment funds that are taxed as trusts will be taxed at 30 per cent.
•The top tax rate on income earned by portfolio investment entities for individual savers will be 30 per cent, down from 33 per cent.
Q & A
If you have a question, contact us and we will endeavour to answer it. Email us here.
Frequently asked questions will be listed below.
Will members have to complete a tax return if they invest in KiwiSaver?
Generally, no. However, if members provide an incorrect tax rate and tax is calculated on this rate, or if they fail to advise their scheme provider if their rate changes, they may need to file a tax return regarding the shortfall in, or overpayment of, tax.
The scheme provider will seek information from members when they join, and annually thereafter, as to their applicable tax rate.
Members will also need to file a return if they wish to claim the administration fee or any switching fee charged to their member account as a tax deduction.
When members withdraw from KiwiSaver on retirement, will the proceeds be taxable income?
If Fund Withdrawal Tax (FWT) does not apply, then under current legislation there is no tax payable on KiwiSaver scheme withdrawals. KiwiSaver schemes are subject to restrictions that mean payment of FWT is unlikely, but withdrawals of vested employer contributions made within two years of permanent emigration or retirement at 65 could be subject to FWT. If FWT applies, this is a tax of 5% of the liable withdrawn amount imposed on the trustee, and would be deducted from the relevant withdrawal.
FWT will generally not be payable:
•Where the withdrawal consists of contributions identified as the member's own;
•If a member transfers from one superannuation scheme to another;
•If a withdrawal is made to alleviate "significant financial hardship" or to purchase an annuity or pension of 10 years or more duration, or to purchase or pay certain insured benefits;
•Where a withdrawal is required to meet a settlement under the Property (Relationships) Act 1976;
•If employment ceases due to injury, disablement or death;
•If the withdrawal results from cessation of employment and the member has been employed for at least two years prior to the year of cessation and met other specified criteria;
•If the member's taxable income and employer contributions are less than $60,000 per annum in each of the four years prior to the year in which the withdrawal is made. In this case, a proportionate reduction in FWT is calculated;
•In respect of employer contributions made prior to 1 April 2000 and any made after that date which have not increased as a percentage of the member's salary;
•In respect of an increase in employer contributions made prior to 1 April 2000.
Are employee contributions exempt from PAYE?
A common query is whether employee contributions to KiwiSaver are subject to PAYE. The uncertainty is due in part to inferences on several official websites that such contributions will not attract PAYE.
Unfortunately, employee contributions to KiwiSaver are not exempt from PAYE. Employee contributions must be included in PAYE calculations. That said, the amount the employee contributes is not actually reduced by PAYE. Instead, the PAYE owing in respect of that contribution is deducted by the employer from the remainder of the employee's salary.
What this means in practice is that if an employee elects to contribute 2% (3% from 2013), of the gross wages and salary to KiwiSaver, then that full amount will be credited to the KiwiSaver account. PAYE as calculated on the gross salary (that is, including the employee contribution), will then be deducted from the remainder of that employee's salary.
Assume an employee earning $2,000 per fortnight elects to make a 4% employee contribution:
•The amount of KiwiSaver contribution would be $80 per fortnight ($2,000 x 4%) and that full amount would be credited to that persons KiwiSaver account;
•If the relevant PAYE rate was 33%, the employer would then deduct $660 per fortnight ($2,000 x 33%) from the remainder of that persons salary (this is overly simplistic as it ignores the effective PAYE rate and additional items such as ACC, etc but is for illustration purposes only); and,
•As a result, the net amount received by the employee after making his or her KiwiSaver contribution would be $1,260 per fortnight.
What about where an employee's salary varies due to overtime and other penal rates?
Most salary sacrifice arrangements are relatively easy to implement if employees are on fixed salaries. The process is more complicated (but nonetheless achievable) if employees have a variable salary/wage package that includes penal rates and overtime, etc.
The objective in such a circumstance is to ensure the employee sacrifices the correct amount from both the employee's base package and any additional items the employee may otherwise become entitled to receive.