Hon Peter Dunne
Minister of Revenue
Further help for saving as KiwiSaver tax exemption extended
The tax exemption for employer contributions to KiwiSaver will be extended to other registered superannuation schemes, Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced today.
"This is a further significant step to help New Zealanders save for their future," said the Ministers.
Employers currently pay SSCWT – specified superannuation contribution withholding tax – on their contributions to registered superannuation schemes, although contributions to KiwiSaver schemes were exempted under legislation enacted in September.
"It is essential that New Zealanders develop long term savings habits so they can have more financial security in their retirement years.
"By making employer contributions tax free, we are making it even more attractive for workers to save as their balances will grow much quicker with an employer subsidy whether they opt for KiwiSaver or stay in an existing scheme.
"Extending the exemption will also ensure tax neutrality between KiwiSaver and other registered superannuation schemes.
"Under the changes announced today, employer contributions to other registered schemes will be exempt from tax for amounts of up to 4 percent of an employee's gross salary.
"A tax-free employer contribution will mean, for example, an extra $660 a year in savings for people earning $50,000 a year who contribute 4 percent of their salary and whose employers contribute another 4 percent.
"This is a win-win. Employers who take advantage of the opportunity to contribute to the long-term financial well being of their staff are likely to see greater employee job satisfaction, as well as greater loyalty and retention.
"The tax exemption will be available only for contributions to schemes that have lock-in rules similar to those of KiwiSaver, for which schemes will have to amend their trust deeds.
"The extended exemption will apply from 1 July 2007, when KiwiSaver begins, and will be added to the taxation bill currently before Parliament by means of a Supplementary Order Paper.
"That bill also encourages people to save through KiwiSaver by removing the current over taxation of low income earners who invest in managed funds. In future KiwiSavers who earn less than $38,000 will be taxed at 19.5 per cent on their savings, not 33 per cent," said the Ministers.
Today's announcement builds on the significant progress this government has made in helping this country save and prepare for the future through:
- Reversing National's cuts to New Zealand Superannuation, restoring the married rate to not less than 65 per cent of the average net ordinary time weekly wage
- Establishing the New Zealand Superannuation Fund to help fund the future cost of New Zealand Superannuation
- Introducing the State Sector Retirement Savings Scheme for civil servants
- Introducing workplace-based saving through KiwiSaver with a tax exemption for employer contributions.
"This government has made saving a priority. We have put in place a firm foundation to allow today's generation and generations to follow to have greater confidence that they will be able to meet their retirement aspirations," said Dr Cullen.
Mike Jaspers, press secretary for Dr Cullen, 04 471 9412, 021 270 9013
Ainslie Fenwick, policy advisor for Peter Dunne, 04 471-9728, 021 270 9052.
The official KiwiSaver website www.kiwisaver.govt.nz provides full information on the scheme.
Questions and answers
What is SSCWT?
SSCWT stands for Specified Superannuation Contribution Withholding Tax. It is a tax on any monetary contribution to a superannuation fund that is paid by the employer for an employee's benefit.
Employer contributions made to a superannuation fund are subject to SSCWT. It differs from tax on employee superannuation contributions, which is normally subject to tax at personal marginal tax rates.
What is the KiwiSaver SSCWT exemption?
The KiwiSaver SSCWT exemption was introduced to encourage employers to contribute to their employees' savings for retirement. The exemption allows employees' balances to grow quicker, without being reduced by tax. Under the exemption, employer contributions to a KiwiSaver scheme are exempt from SSCWT, subject to a cap – the lesser of the employee's contribution or 4% of the employee's salary or wages.
For example, if the employee and the employer each contribute 4% to a KiwiSaver scheme, SSCWT will be exempt on all 4% of the employer's contribution. If an employee contributes 2% to a KiwiSaver scheme and an employer 3%, there will be no SSCWT on 2% of the employer contribution. (The remaining 1% would have SSCWT.)
How is the exemption being extended?
The exemption is being extended to include employer contributions to other registered superannuation schemes, subject to the same cap as the KiwiSaver SSCWT exemption. The change will apply from 1 July 2007 – the date that KiwiSaver is launched and the KiwiSaver SSCWT exemption applies.
Why is the SSCWT exemption being extended?
Limiting the exemption to KiwiSaver schemes would make KiwiSaver a tax-preferred investment, thus creating distortions. That would create a risk that existing employer-sponsored superannuation schemes would wind up, leading to the distribution of savings from those schemes. Anecdotal evidence suggests that some members would spend their savings rather than reinvest them in similar retirement savings vehicles. That would be counter to the government's objective of increasing savings.
How will the extension work?
For employer contributions to be exempt from SSCWT, the following conditions must be met:
- The registered superannuation scheme must be a defined contribution scheme with at least 20 non-associated members.
- The scheme must be registered as at 1 July 2007.
- As a minimum, the KiwiSaver lock-in rules relating to withdrawals will apply, and more lenient withdrawal provisions will not be permitted. That means lock-in until age 65 or five years of membership, whichever is the later, except for:
- first home ownership;
- significant financial hardship;
- serious illness; or
- permanent emigration.
- The minimum contribution rate to the locked-in account is 4 per cent of the employee's gross base salary or wages, and:
- employer contributions can count towards this; and
- if such contributions count, the contributions have to vest immediately.
- Members cannot borrow against the locked-in amount.
- Contributions (of both member and employer) in the locked-in account are required to be transferred to a KiwiSaver scheme or another approved scheme, if the member ceases to be eligible to be a member of that scheme or otherwise ceases membership.
Employee and employer contributions to which the exemption from SSCWT applies must be locked in. Any contribution over and above the minimum 4 per cent contribution can be subject to the scheme's normal withdrawal rules. For example, if an employer contribution is 10 per cent and an employee contribution is 10 per cent, then 8 per cent in total will be locked in (4 per cent employee contributions and 4 per cent employer contributions, which are subject to the SSCWT exemption). The remaining 12 per cent could be subject to the scheme's normal lock-in rules, and the employer's contribution will be subject to SSCWT.
The exemption for employer contributions is capped at 4 per cent of an employee's contribution or 4 per cent of the employee's salary or wages, whichever is less.
The Government Actuary will have to approve a scheme as having met the required criteria to be eligible for the exemption. The scheme will have to provide statistical information, on a regular basis, to the Government Actuary about the funds held in the locked-in accounts.
What is the estimated fiscal cost of extending the exemption?
The cost is estimated to be around $17 million in forgone revenue in 2007/08, increasing to $18 million in 2008/09 and $19 million in 2009/10. These calculations are subject to a number of sensitive assumptions, including an assumption of how many people will avail themselves of the exemption.
Will the SSCWT tax exemption favour just those people on higher incomes who can already afford to save more for retirement anyway?
No. The SCCWT exemption is capped to the lesser of the employee's contribution or 4% of the employee's salary or wages.
Why will the SSCWT exemption be capped?
The cap on the tax exemption afforded to employer schemes has been designed to align with the cap on the tax exemption for KiwiSaver schemes. This is to allow for a more level playing field between KiwiSaver and other employer schemes. Putting a cap on the SSCWT exemption reduces the risk of abuse – it is a prudent measure intended to prevent excessive "salary sacrifice" arrangements being entered into for the purpose of reducing someone's tax liability rather than for saving. In addition, the cap will limit the fiscal cost to the government of the SSCWT exemption.
Won't the exemption encourage "salary sacrifice"?
The exemption may lead to salary sacrifice arrangements to a degree, but the cap will help ensure that aggressive salary sacrifice arrangements do not occur.
Won't the exemption encourage employees and unions to increase pressure on employers to contribute to superannuation schemes?
Some employers, employees and unions may wish to discuss the option of employer contributions as part of their normal negotiations over remuneration and work conditions.
Why aren't contributions made by the self-employed and employees eligible for the exemption?
The tax exemption is on SSCWT, which is not paid by employees or the self-employed.
Why not have a tax exemption for contributions made by the self-employed and employees?
The main reason for the tax exemption was to encourage employers to contribute towards their employees' savings for retirement. Having a tax exemption on contributions made by the self-employed would be inconsistent with that goal.
Isn't the government just encouraging the self-employed to structure themselves as companies?
There are many reasons why the self-employed may not want to structure themselves as companies. The government does not think that extending the exemption to them would be the deciding factor in their choice of structures.
Will members of existing schemes be eligible for the $1,000 government contribution and the fee subsidy that applies to KiwiSaver members?
No. Other schemes will have their own features to encourage membership.
I'm a member of my employer's superannuation scheme and earn $30,000 a year. I contribute 2% of my salary and my employer contributes an additional 2%. What does the exemption mean for me?
If your employer's scheme changes its trust deed to allow members to access the exemption and you elect to have your funds subject to the KiwiSaver lock-in rules, you will be eligible for your 2% employer contributions to be tax-free. The annual benefit to you will be $126 a year (based on a 21 percent SSCWT rate).
I'm a member of my employer's superannuation scheme and earn $50,000 a year. I contribute 6% of my salary, and my employer contributes an additional 6%. What does the exemption mean for me?
If your employer's scheme changes its trust deed to allow members to access the exemption and you elect to have your funds subject to the KiwiSaver lock-in rules, you will be eligible for your 4% employer contributions to be tax-free. The annual benefit to you will be $660 a year (based on a 33 percent SSCWT rate).
I'm a member of my employer's superannuation scheme and earn $80,000 a year. I contribute 4% of my salary, and my employer contributes an additional 4%. What does the exemption mean for me?
If your employer's scheme changes its trust deed to allow members to access the exemption and you elect to have your funds subject to the KiwiSaver lock-in rules, you will be eligible for your 4% employer contributions to be tax-free. The annual benefit to you will be $1,056 a year (based on a 33 percent SSCWT rate).