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Taxation KiwiSaver Student Loans and Remedial Matters Bill

KiwiSaver

General submissions

Changing contribution rates through a scheme provider or Inland Revenue

Collecting KiwiSaver income and ESCT rate information

Reducing the KiwiSaver transfer period

Other KiwiSaver matters

New early KiwiSaver withdrawal category for people with life-shortening congenital conditions

GENERAL SUBMISSIONS

Issue: Support for the proposed amendments to KiwiSaver

Submission

(Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, Financial Services Council, PwC)

Three submitters were supportive of the proposed amendments. (Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, Financial Services Council)

Two submitters supported the proposal to allow Inland Revenue to on-pay employer contributions to KiwiSaver scheme providers based on employment income information. (PwC, KPMG)

One of the above submitters noted how the proposal operates in practice will be key. (KPMG)

Recommendation

That the support be noted.

Issue: Greater consultation expected

Submission

(Corporate Taxpayers Group)

The submitter felt there had been insufficient industry consultation.

Comment

The proposed changes are part of Inland Revenue’s Business Transformation programme which will see the various tax types and functions administered through the tax system transferred to the department’s new technology platform. KiwiSaver will transition in April 2020 and this has meant that time available for consultation was constrained. It is desirable to implement legislative amendments aiming to enhance the central of administration of KiwiSaver at the same time.

Officials also note there is on-going engagement with KiwiSaver scheme providers about the changes (the main industry affected), including during the policy development phase.

Recommendation

That the submission be noted.

Issue: Recovering unpaid employer contributions from scheme providers

(Clause 21)

Submission

(Corporate Taxpayers Group, Financial Services Council)

The submitters queried who would be liable if the employer did not subsequently pay the employer contribution amount to Inland Revenue and if there needed to be a mechanism in place for Inland Revenue to recover unpaid contributions from a KiwiSaver scheme provider.

Comment

Officials consider that such a mechanism is unnecessary. Where an employer has not paid an employer contribution amount by its due date, proposed amendments to section 78 of the KiwiSaver Act 2006 specify that the unpaid contribution would be paid from a Crown Bank Account (effectively creating a debt from the employer to Inland Revenue). Therefore, the employer contribution amount would not need to be recovered from the KiwiSaver scheme provider. This approach ensures employees are not disadvantaged by their employer’s non-payment and is consistent with the approach Inland Revenue currently adopts in relation to KiwiSaver employee contributions.

Recommendation

That the submission be declined.

Issue: Aligning the provisional and holding periods with the opt-out period

(Clauses 6, 7, 8, 9)

Submission

(Financial Services Council)

The submitter supports the proposal to reduce the KiwiSaver provisional period and holding period from three months to two months. However, the submitter sought clarification as to whether the intent is also to change the KiwiSaver opt-out period, noting it would be good to synchronise the provisional period with the opt-out period.

Comment

Officials intent is not to align the provisional period and holding period with the KiwiSaver opt-out period. The proposal in the Bill would reduce the holding period from 92 days to 62 days, while the opt-out period would remain from day 13 until the end of day 55 after a person has been automatically enrolled in KiwiSaver.

Maintaining a holding period that is slightly longer than the opt-out period reduces the risk of contributions being transferred to KiwiSaver scheme providers, ahead of an opt-out request being processed. This should prevent an increase in contributions that need to be recovered by Inland Revenue from scheme providers because of opt-outs.

Recommendation

That the submission be declined.

Issue: More education about KiwiSaver residence requirements

(Clauses 10, 11, 12)

Submission

(Financial Services Council)

The submitter supported removing the three-month grace period for people who were invalidly enrolled in KiwiSaver to meet the KiwiSaver residence requirement. However, to reduce the number of people invalidly enrolled, the submitter recommends Inland Revenue consider providing more education about the KiwiSaver residence requirements.

Comment

Removing the three-month residence grace period, would mean Inland Revenue would be able to contact an employer who has invalidly enrolled a person as soon as the invalid enrolment has been identified (to let them know that the KiwiSaver account has been closed). This would mean Inland Revenue would be able to help these employers understand the KiwiSaver residence requirements sooner, therefore, potentially preventing subsequent invalid enrolments. Officials also note that Inland Revenue already has information on its KiwiSaver website and in its KiwiSaver guide for employers, explaining the KiwiSaver residence requirements.

Recommendation

That the submission be declined.

Issue: Calculating interest on contributions not received

(Clause 23)

Submission

(Financial Services Council)

The Bill proposes that interest paid on contributions while they are held by Inland Revenue would start accruing from the date of the member’s payday. The submitter sought clarification about how interest would be calculated and paid on contributions Inland Revenue had not yet received.

Comment

For the purpose of calculating interest payments, KiwiSaver contributions would be treated as received by Inland Revenue on the date of the member’s payday, as reported by the employer.

Recommendation

That the submission be noted.

CHANGING CONTRIBUTION RATES THROUGH A SCHEME PROVIDER OR INLAND REVENUE

(Clause 14)

Issue: Support for the proposal

Submission

(ANZ, Chartered Accountants Australia and New Zealand, Financial Services Council, PwC)

Submitters supported the proposal that would allow KiwiSaver members to change their contribution rate by giving notice to their scheme provider or Inland Revenue.

One submitter noted the change would positively impact s retirement outcomes and ensure KiwiSaver scheme providers have the ability to effectively engage with their members on this matter. (Financial Services Council)

Another submitter supported the proposal on the basis it would improve the member experience by making it easier for members to review and change their contribution rate. Consequently, this submitter strongly opposed the possibility of the proposal being removed from the Bill. (ANZ)

Recommendation

That the support be noted.

Issue: Proposal creates compliance costs

Submission

(Corporate Taxpayers Group, Deloitte, EY, Martin Etherington)

The change will increase compliance costs for employers. (Corporate Taxpayers Group, Deloitte, EY)

One of these submitters also noted that the proposed notification process (where an employer actions a contribution rate change request once notified by the employer) would likely not be as efficient as a contribution rate change request made directly to an employer. However, this submitter felt it was desirable to have flexibility in the legislation and overall viewed the amendment as favourable, to the extent there was evidence indicating it was something employees would find useful. (EY)

One submitter was of the view the proposal should be removed from the Bill on the basis it would add complexity to the KiwiSaver scheme rules and introduce additional administrative costs for KiwiSaver scheme providers and Inland Revenue. (Martin Etherington)

Comment

Officials recommend that the application date for this proposal should be deferred until 1 April 2022 or an earlier date set by Order in Council.

The proposed change has received public support and would be worth implementing. However, deferring the application date would enable officials to undertake further consultation with stakeholders to explore the root of concerns raised in more detail and to investigate an operational approach that would minimise the compliance cost of this change for employers.

Allowing for the new application date for this proposal to be set by Order in Council at a date earlier than 1 April 2022 would mean there could be flexibility around when the proposal was introduced, to ensure the change could be implemented at a time that was workable for affected parties.

Recommendation

That, subject to officials’ comments, the submission be accepted.

Issue: Proposal should not be deferred

Submission

(ANZ, Financial Services Council)

The submitters were of the view it would not be cost effective to defer the change past its current application date of 1 April 2020 (as this would require employers and payroll providers to make further KiwiSaver compliance changes at a later stage).

Comment

Based on concerns outlined above by other submitters, officials are recommending that the application date of the proposal be deferred until 1 April 2022 or an earlier date to be set by Order in Council. As employers and payroll providers update payroll specifications each tax year, making the change for a post 1 April 2020 tax year is unlikely to increase the implementation cost for employers and payroll providers.

Recommendation

That the submission be declined.

Issue: The first pay period that the contribution rate change applies to

Submission

(Deloitte, EY)

Where a KiwiSaver member changes their contribution rate through their KiwiSaver scheme provider or Inland Revenue, the member’s employer would be required to apply the new contribution rate to the next “payment of salary or wages that is calculated” after being notified by Inland Revenue about the contribution rate change. Submitters raise concerns that it may not always be workable for an employer to comply with this requirement (for example, if a notification is received by an employer after details for their next pay run have already been finalised).

Employers should instead be required to respond to the rate change request as soon as practicable after receiving the notification from Inland Revenue, or the legislation should prescribe that if a rate change request is received within three working days of a pay run it does not need to be applied until the following pay run.

Comment

Under the existing legislation employers must already apply a new contribution rate to the next payment of salary or wages that is calculated after receiving notice from their employee of this request. This same timeframe applies for stopping KiwiSaver deductions where an employer receives notice from Inland Revenue that one of their employees has opted to go on a savings suspension. These rules have been in place since KiwiSaver was introduced in 2007 and officials are not aware of employers having difficulty complying with them in the past.

Moreover, once pay run details are finalised, an employer would have already calculated a payment of salary or wages. Therefore, in the situation the submitter has concerns about, the existing wording of the amendment would already allow employers to first apply the new contribution rate to the subsequent pay run.

Recommendation

That the submission be declined.

Issue: Contribution rate information should be sent to scheme provider

Submission

(ANZ, EY)

Members’ contribution rates should be reported to KiwiSaver scheme providers. (ANZ)

Where a contribution rate change application is made to Inland Revenue under proposed new section 64(2D) of the KiwiSaver Act 2006, Inland Revenue should be required to notify the member’s scheme provider of the contribution rate. (EY)

Comment

Officials note that currently employers are not required to report information to Inland Revenue about the KiwiSaver contribution rates selected by their employees. As Inland Revenue does not hold this information, it is not possible for Inland Revenue to pass this information on to KiwiSaver scheme providers. Requiring employers to report their employees’ contribution rates to Inland Revenue would have compliance costs for employers and consultation would need to be undertaken to ascertain the scale of these compliance costs.

Officials also consider that if facilities were introduced to report contribution rates to Inland Revenue it would be more helpful if scheme providers received this information about all their members, not just members who had made a contribution rate request through a scheme provider.

With officials recommending deferring members being able to change their contribution rate through a scheme provider or Inland Revenue, this would allow time for further consideration to be given to sharing contribution rate information with KiwiSaver scheme providers, ahead of this proposal being introduced.

Recommendation

That the submission be declined.

Issue: Certainty about when contribution rate change processed

Submission

(Financial Services Council)

The legislation should either specify a timeframe within which Inland Revenue must give notice to the employer of the employee’s request to change contribution rates or Inland Revenue should be required to confirm to the member and the member’s scheme provider, it has given notice to the member’s employer of the contribution rate change.

Comment

Inland Revenue would provide notice to an employer of a contribution rate change as soon as possible after receiving the contribution rate change request from a KiwiSaver scheme provider or member. Officials are recommending that the application date for this proposal be deferred to give further consideration to the operational design of the proposal. As operational design considerations could have implications for the delivery of information to Inland Revenue, officials are of the view a timeframe for providing notice to an employer should not be set.

Officials consider there to be limited benefit in advising a scheme provider when notice has been provided to an employer of a contribution rate change in isolation. Rather, as noted in relation to the above submission, information about all members’ contribution rates is likely to be more useful to scheme providers.

Recommendation

That the submission be declined.

Issue: Timeliness of providing information to employers

Submission

(PwC)

It would be important to ensure information was provided to employers in a timely manner to ensure the preferred employee contributions are being deducted from an employee’s salary or wages at their preferred rate.

Comment

As noted, it is intended that Inland Revenue provide notice to an employer of a contribution rate change as soon as practicable after receiving the contribution rate change request from a KiwiSaver scheme provider or member.

Recommendation

That the submission be noted.

Issue: Scheme providers should share contribution rate information with employers

Submission

(EY)

The submitter recommended that proposed new section 64(2C) of the KiwiSaver Act 2006 be amended so that KiwiSaver scheme providers would be required to notify a member’s employer (in addition to notifying Inland Revenue) where the member has made a contribution rate change request to their scheme provider.

Comment

The existing proposal would only require KiwiSaver scheme providers and employers to communicate with one other party (that is, Inland Revenue). Therefore, this submission would add significant complexity to the proposal, as KiwiSaver scheme providers would be required to communicate with all the employers of members who requested a contribution rate change. Moreover, as there are no existing channels for KiwiSaver scheme providers and employers to communicate, officials consider this recommendation would introduce additional administrative costs for both KiwiSaver scheme providers and employers.

The recommendation could also create issues where a member has not provided accurate employer details to their scheme provider when requesting a contribution rate change. This could result in KiwiSaver scheme providers being unable to satisfy their obligation to notify an employer of the contribution rate change. In contrast, Inland Revenue is better placed to determine whether a member’s employer details are accurate, as these details can be verified against information Inland Revenue already holds.

Recommendation

That the submission be declined.

Issue: Guidance about implementing the proposal

Submission

(ANZ)

The submitter sought further guidance about how the proposal would work in practice. In particular, how contribution rate changes would be communicated between KiwiSaver scheme providers, Inland Revenue, and employers.

Comment

Inland Revenue officials will continue to work with stakeholders to establish a more detailed operational process for this change. Deferring the application date would provide further time to work through the operational details with stakeholders before the change must be implemented.

Recommendation

That the submission be accepted, subject to officials’ comments.

COLLECTING KIWISAVER INCOME AND ESCT RATE INFORMATION

(Clauses 13, 25, 132)

Issue: Support for the proposal

Submission

(PwC, Financial Services Council)

Submitters supported employers being required to provide KiwiSaver income and employer superannuation contribution tax (ESCT) rate information to Inland Revenue.

Recommendation

That the support be noted.

Issue: Compliance costs on employers

Submission

(Corporate Taxpayers Group, Deloitte, Martin Etherington)

One submitter raised concerns about the compliance costs for employers associated with the proposal. (Corporate Taxpayers Group)

Collecting ESCT rate information will impose unnecessary compliance costs on employers, as Inland Revenue should already be able to calculate an employee’s ESCT rate based on employment income information already collected from employers. (Deloitte, Martin Etherington)

Comments

ESCT rate information

While collecting ESCT rates would make it easier for Inland Revenue to detect potential miscalculations of ESCT deductions by employers (for example, where an employer has selected the correct ESCT rate but miscalculated the deduction); officials agree that the compliance costs on employers of this change would outweigh these benefits. Therefore, officials recommend that the requirement for employers to report ESCT rate information to Inland Revenue for new employees and existing employees where the information has changed, should be removed from the Bill.

KiwiSaver income information

The Bill currently proposes that employers be required to provide information to Inland Revenue about the income an employee’s KiwiSaver contributions are calculated from (as there are some amounts treated as income for PAYE that are excluded from the KiwiSaver definition of “salary and wages” for new employees and existing employees where this information has changes since it was last reported). To address concerns raised about compliance costs on employers, officials recommend changing the proposal so that employers would only be required to report this information to Inland Revenue about new employees. As a result, reporting this information could be incorporated into new employee on-boarding reporting processes.

As any differences between income for PAYE purposes and for KiwiSaver purposes generally does not change during the course of an employment relationship, collecting this information in relation to new employees only is likely to be sufficient for Inland Revenue to more effectively detect miscalculations of KiwiSaver contributions.

Recommendation

That, subject to officials’ comments, the submission be accepted.

Issue: Reporting ESCT rate information on a payday basis

Submission

(EY)

Employers should be given the option of reporting ESCT rate information to Inland Revenue every payday, rather than only for new employees and also when this information has changed since it was last reported as proposed in the Bill. This would make it easier for the change to be programmed into automated PAYE information reporting systems.

Comment

This is no longer a consideration as officials are recommending that the proposal to require employers to report ESCT rate information to Inland Revenue be removed from the Bill.

Recommendation

That the submission be declined.

Issue: Include the value of accommodation with the definition of “salary and wages” for KiwiSaver

Submission

(Martin Etherington)

The objective of Inland Revenue being able to identify earnings an employee is receiving that are not subject to the KiwiSaver definition of salary and wages is supported. However, this could be achieved by aligning the definition of “salary and wages” in the KiwiSaver Act 2006, with the definition of income used in the Accident Compensation Act 2001 for the ACC earners’ levy. This alignment could be achieved by including the value of accommodation within the definition of “salary and wages” in the KiwiSaver Act 2006.

Comment

Officials note that the definition of salary and wages used in the KiwiSaver Act 2006 is based on the definition of salary and wages used in the Income Tax Act 2007. However, there are some differences in recognition of the fact that including certain payments may impact the affordability of KiwiSaver.

The value of accommodation was not included in the definition of salary and wages in the KiwiSaver Act 2006 as doing so could have a significant impact on the affordability of KiwiSaver for both employees and employers. Generally, if an employee is required to have contributions deducted from a payment, an employer will also be required to take this payment into account when calculating compulsory employer contributions.

Officials also note that including the value of accommodation within the definition of “salary and wages” in the KiwiSaver Act 2006, would not align it with the definition of income used for the ACC earners’ levy. For example, weekly paid parental leave payments are included within the definition of “salary and wages” for the purpose of KiwiSaver employee contributions but are not included within the definition of income for the purposes of the ACC earners’ levy. Therefore, further alignment of these definitions could have adverse impacts on KiwiSaver members’ retirement savings.

Recommendation

That the submission be declined.

Issue: General comments on greater information gathering capabilities

Submission

(Corporate Taxpayers Group)

If Inland Revenue were to obtain greater quantities of information as a result of proposed amendments to the KiwiSaver Act 2006, it needs to ensure that there is a good reason to do so and that the information was being used for a particular purpose.

Comment

As outlined above officials are recommending revisions to the KiwiSaver information collecting amendments included in the Bill, so that information will only be collected when there is a clear reason to do so. Information would only be collected where it is necessary for Inland Revenue to be able to ensure that KiwiSaver members are receiving their correct contribution entitlements.

Recommendation

That the submission be noted.

REDUCING THE KIWISAVER TRANSFER PERIOD

(Clauses 8 and 9)

Issue: Support for the proposal

Submission

(Chartered Accountants Australia and New Zealand, Financial Services Council)

One submitter supported aligning the transfer times for default and non-default KiwiSaver scheme providers, noting that such transfers usually happen quickly. (Financial Services Council)

Recommendation

That the submitters’ support be noted.

Issue: Exception to 10-day transfer rule sought

Submission

(Kensington Swan)

The submitter sought the introduction of an exception to the proposed 10 working days transfer rule, so that members were able to contract out of this transfer period if they wish to. The rationale for this was that it may be difficult for KiwiSaver providers offering “self-select” schemes (which enable investors to design their own KiwiSaver investment portfolio) or schemes investing in alternative asset classes (such as venture capital or private equity) to realise alternative assets for fair value or have access to sufficient liquid investments within the 10 day timeframe.

Comment

Officials consider that overall the risk described by the submitter is minimal. It is noted that as per their instruments of appointment, default KiwiSaver scheme providers already transfer default members within 10 days without issue. Many of these providers are already applying a 10 day transfer time to the transfer of all funds.

In addition, the legislation would also permit schemes to exceed the 10 working day transfer rule, so long as it was agreed to between the old and new KiwiSaver schemes. Officials consider that this provision provides sufficient protection for scheme providers.

Recommendation

That that submission be declined.

OTHER KIWISAVER MATTERS

Issue: Insufficient information provided to employers around KiwiSaver opt-outs

Submission

(PwC)

When employees opt-out of KiwiSaver, employers are given insufficient information from Inland Revenue about amounts refunded. In the future Inland Revenue should provide clarity to an employer as soon as refunded amounts are processed.

Currently Inland Revenue may refund contributions to the employer for members who have opted-out of KiwiSaver, without including details of which employees the refunded amount relates to. This can cause issues for the employer when the refunded amounts formed part of a total renumeration package and therefore need to be returned to the employee.

Comments

The KiwiSaver Act 2006 does not prescribe what form information to employers about refunded contributions must take, therefore, a legislative remedy is not required. Inland Revenue is looking at ways to enhance the central administration of KiwiSaver. This includes ways to more effectively communicate with employers in relation to KiwiSaver refunds.

Recommendation

That the submission be noted.

Issue: Entitlement to Government contribution ceasing at 65

Submission

(Neville Wynn)

Over 65 year olds should continue to be entitled to the annual KiwiSaver government contribution.

Comments

The upper age limit for compulsory employer contributions is linked with the age a KiwiSaver member qualifies for New Zealand superannuation, as well as the age they are able to withdraw their savings (that is, 65 years old).

Unlike other KiwiSaver members, over 65 year olds are able to withdraw their funds. Officials therefore note that extending entitlement to the annual government contribution to over 65 year olds, would create a risk of over 65 year olds inappropriately circulating money in and out of their KiwiSaver account to receive the government contribution (that is, immediately withdrawing the annual government contribution and then re-investing this same amount with their KiwiSaver scheme provider, so that it would count towards their entitlement to their next government contribution). This outcome would not be consistent with the purpose of this incentive, which is to encourage long-term retirement savings.

Recommendation

That the submission be declined.

Issue: Entitlement to compulsory employer contributions for under 18 year olds

Submission

(Ayush Vyas)

Under 18 year olds should be entitled to compulsory employer contributions.

Comments

Setting a minimum age of entitlement to compulsory employer contributions at 18 years old avoids an incentive being created for those aged 16 or 17 to leave educational training and enter the workforce in order to obtain the benefit of compulsory employer contributions. By encouraging young people to stay in educational facilities for longer, the current setting helps to ensure the greater earning power of those young people (through higher education) and hence improve their ability to save in the future.

Setting the minimum age of entitlement to compulsory employer contributions and the annual government contribution at 18 is also consistent with the KiwiSaver automatic enrolment rules. Aligning these rules helps to ensure the scheme remains simple for employers to administer.

Any changes to this setting would raise issues that would require resourcing and prioritising as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: Flexibility of employee contribution rates

Submission

(Martin Etherington)

Employees should be able to have KiwiSaver contributions deducted from their salary or wages at any rate up to a maximum of 10% (this would include rates that are not whole numbers). This would allow voluntary contributions (which are currently paid directly to scheme providers) to be reported and paid in the same manner as other KiwiSaver contributions deducted (that is, through Inland Revenue).

Comments

There is a trade-off between providing flexibility for members and ensuring KiwiSaver remains simple, with low administrative and compliance costs for employers. Allowing members to contribute at any rate above 3% would increase compliance costs for employers (especially for smaller employers not using payroll software).

Officials also note that voluntary contributions are often in the form of one-off lump sum payments. As they are not necessarily regular payments nor will they always be made out of an employee’s salary or wages, it would be undesirable to require that these contributions are subject to the same reporting and payment process as the percentage based contributions deducted from members’ salary or wages.

Officials believe the additional 6% and 10% rates introduced in the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 adds sufficient flexibility for members, without over complicating the KiwiSaver employee contribution rules.

Recommendation

That the submission be declined.

Issue: “Lock-in” of QROPS funds in KiwiSaver schemes

Submission

(PwC)

An amendment should be made to the KiwiSaver Act 2006 to introduce a new permitted withdrawal ground that allows UK retirement savings currently held in a KiwiSaver scheme to be transferred to a qualifying recognised overseas pension scheme (QROPS). This would address the issue of UK migrants who transferred their retirement savings to a KiwiSaver scheme before it lost its QROPS status effectively being “locked-in” to their current KiwiSaver scheme provider.

Background

Under UK law, migrants can transfer their UK retirement savings out of the UK to a QROPS. If these UK retirement savings are not transferred to a QROPS (or are withdrawn) then a migrant can be subject to a UK pension tax of 55% of the total savings transferred.

Previously, KiwiSaver schemes were QROPS. However, the QROPS criteria were tightened in April 2015 to ensure savings could not be withdrawn until retirement age. Because of the KiwiSaver first home withdrawal facility, this led to KiwiSaver schemes no longer qualifying as QROPS.

This has resulted in UK migrants who transferred their retirement savings to a KiwiSaver scheme before it lost its QROPS status effectively being “locked-in” to their current KiwiSaver scheme provider. This is because:

  • another KiwiSaver scheme will not accept an inward transfer of a KiwiSaver account that includes UK retirement savings; and/or
  • transferring to another KiwiSaver scheme would trigger the 55% UK tax liability.

As the KiwiSaver Act 2006 only allows for KiwiSaver accounts to be transferred to other KiwiSaver scheme providers, it is currently not possible for an affected member to transfer their UK retirement savings to a non-KiwiSaver New Zealand QROPS.

Comments

Officials are aware of the matter raised in this submission, however, note that it requires prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: ESCT rate for employee with secondary tax code should be the same as base tax rate

Submission

(Martin Etherington)

An employer determines the ESCT rate for an employee based on the employee’s earnings from that employer only, without regard to earnings the employee may have elsewhere or the tax code the employee has declared. The submitter proposes the ESCT rate for employees using a secondary (or other fixed rate) tax code should be the same as the base tax rate for that tax code.

Comments

Using a secondary tax code can result in some individuals overpaying tax during the year. As the employee’s secondary income will be subject to a flat rate of tax at their marginal tax rate, tax is overpaid when this secondary income takes a person’s total income over a tax threshold. In this situation the individual will be entitled to a refund of the overpaid tax at the end of the tax year.

In contrast, ESCT is treated as a final tax, which means overpaid ESCT cannot be refunded. Therefore, if the same rate of tax was applied to employer superannuation contributions paid by a second employer as was applied to other earning received from that employer, this would create situations where tax would be overpaid without an entitlement to a refund.

Recommendation

That the submission be declined.

Issue: Reporting employer’s name and address to Inland Revenue

Submission

(Matter raised by officials)

Under proposed new section 64(2C) of the KiwiSaver Act 2006 when giving notice to Inland Revenue that a member has made a contribution rate change request, a KiwiSaver scheme provider is required to provide Inland Revenue with the name and address of the employers the member wants the new contribution rate to be applied by. Similarly, under proposed new section 64(2B), a member requesting a contribution rate change through Inland Revenue is required to provide Inland Revenue with the names and addresses of the employers they want the new contribution rate to apply to.

Similar requirements to provide employer name and address details to Inland Revenue also exist in section 38(2) of the KiwiSaver Act 2006 (a KiwiSaver scheme provider is required to report these details to Inland Revenue where a person has enrolled directly with a scheme provider) and section 103 (a member is required to report these details to Inland Revenue when applying to go on a savings suspension).

Issues arise where employer name and address details reported by a scheme provider or member are not accurate. This can occur when a member’s place of work has a different name to the entity they are employed by. For example, a member works at Local Corner Store but are legally employed and paid by Food Conglomerate Limited. As Food Conglomerate Limited will need to administer any changes to the employee’s contribution rate or a savings suspension request, it should be their details that are reported to Inland Revenue. However, often the member will provide Local Corner Store’s details. This can delay the member’s request being actioned.

Comment

Officials recommend that the requirement in proposed new sections 64(2B) and 64(2C), and existing section 38(2) of the KiwiSaver Act 2006, for KiwiSaver scheme providers and members to report an employer’s name and address to Inland Revenue be removed. Instead, Inland Revenue would notify each active employer it has on record for the employee where one of the employees has enrolled in KiwiSaver or of an employee’s new contribution rate if they have requested a contribution rate change through their scheme provider or Inland Revenue.

Officials recommend the requirement in section 103(2)(b) of the KiwiSaver Act 2006 for members to provide employer name and address details should be on an “as required” basis only (that is, when the information has been requested by Inland Revenue). Members who are applying for a savings suspension via their myIR account would indicate which employers they wish the savings suspension to apply to. Inland Revenue would then notify these employers that a savings suspension had been granted and as per existing practice Inland Revenue would also send notice of the savings suspension to the member, which they could show to subsequent employers of their choice. For a member applying for a savings suspension via other channels, to avoid the issue of employer details being misreported, no employer details would be requested. Instead, Inland Revenue would send the member a letter advising that a savings suspension had been granted, which the member could show to employers of their choice. This would ensure the employee could action the savings suspension with relevant employers as soon as possible.

The amendments related to the employer information reporting requirements for KiwiSaver provider opt-ins and savings suspensions are required before Inland Revenue transfers the administration of KiwiSaver into its new IT system from 1 April 2020. The removal of the employer name and address reporting requirements for contribution rate changes would apply from 1 April 2022 or an earlier date set by Order in Council (this being the date that officials are recommending in this report that members be able to change their contribution rate through their KiwiSaver scheme provider or Inland Revenue).

Recommendation

That the submission be accepted.

Issue: Aligning employee address requirements in the KiwiSaver Act 2006 with the Tax Administration Act 1994

Submission

(Matter raised by officials)

Table 2 of schedule 4 of the Tax Administration Act 1994, inserted by the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018, intends to bring together the requirements from the IR330 (Tax code declaration) and KS2 (KiwiSaver deduction form) in a way which supports consolidated “fully electronic onboarding” of new employees (although, paper forms for these requirements will continue to exist). As there is currently significant overlap between these reporting requirements, consolidation would mean employers would no longer be required to provide Inland Revenue with the same information about a new employee twice.

Under Schedule 4 of the Tax Administration Act 1994, an employer must provide a new employee’s contact address to Inland Revenue “as required” (that is, when this information has been requested by Inland Revenue). However, under the KiwiSaver 2006 an employer will always be required to provide an employee’s contact address to Inland Revenue for KiwiSaver new enrolments.

This would mean in situations where Inland Revenue did not require a new employee’s contact address under the Tax Administration Act 1994, the employer would still be required to provide this information if the relevant employee had also been enrolled in KiwiSaver. Such an outcome would be inconsistent with the intent to consolidate new employee reporting requirements.

Comment

To align with the language in the Tax Administration Act 1994, officials recommend that the KiwiSaver Act 2006 be amended to clarify that an employer is only required to provide the contact address of an employee who has been enrolled in KiwiSaver as required.

As new employee reporting requirements are expected to be consolidated by April 2020 (that is, when the administration of KiwiSaver is transferred to Inland Revenue’s new IT system), it is desirable to address this discrepancy now. Therefore, it is recommended amendments apply from 1 April 2020.

Recommendation

That the submission be accepted.

NEW EARLY KIWISAVER WITHDRAWAL CATEGORY FOR PEOPLE WITH LIFE-SHORTENING CONGENITAL CONDITIONS

Issue: Support for the proposals

Submission

(ANZ, BNZ, Financial Services Council of New Zealand, KPMG, Sarah Peters)

Submitters support the proposals that people with a life-shortening congenital condition should be able to access their KiwiSaver funds early.

One submitter supported early withdrawal of KiwiSaver funds for people whose lives are shortened for any reason. (Sarah Peters)

Comment

Officials welcome the support expressed by submitters for the proposals.

Recommendation

That the submissions be noted.

Issue: Definition of life-shortening congenital condition taken to be a life expectancy below the New Zealand superannuation qualification age

(Clauses 38(2) of Supplementary Order Paper 293)

Submission

(Financial Services Council)

The submitter states that the definition of life-shortening as being below the New Zealand qualification age is narrower than their understanding of the original policy intention.

Comment

Officials consider that defining a life-shortening congenital condition as one that shortens a person’s life below the New Zealand qualification age is appropriate. Once a person reaches the age of 65 their KiwiSaver account is unlocked and they are able to access their retirement savings.

To take the definition of life-shortening congenital condition beyond the age of 65 starts to advance the definition into age ranges and timeframes that a person with a normal life-expectancy could reasonably expect to reach in retirement. This withdrawal category has been specifically designed for people who will not reach the age at which their KiwiSaver account would be “unlocked” under existing KiwiSaver settings (65 years old).

Recommendation

That the submission be noted.

Issue: KiwiSaver providers may have a grace period for updating disclosure information

(Clause 37C of Supplementary Order Paper 293)

Submission

(Financial Services Council, BNZ)

The submitters support the proposal that KiwiSaver providers will have additional time to update the disclosure documentation they are required by law to provide to their KiwiSaver members about the new withdrawal category.

One has asked whether the additional time period to update information could also extend to information that they are not legally required to provide but is used to inform investors of the rules relating to their KiwiSaver scheme, for example, material on their website and customer brochures. (BNZ)

Comment

Officials welcome the support but consider that the additional time allowed to update disclosure documentation does not need to be extended to information that is not legally required to be provided.

Recommendation

That the submission about extending the grace period to information that is not legally required be declined.

Issue: Application process

(Clauses 38(2) and (3) of Supplementary Order Paper 293)

Submission

(Financial Services Council, ANZ)

The submitters support the final decision for a member’s withdrawal under the new clause to sit with the supervisor of the KiwiSaver scheme.

One submitter suggests that it may be helpful from a process point of view if a registered medical practitioner were required to provide a statement as part of the standard process for applications for withdrawal in order to ensure consistency across providers.

The submitter also expressed their support for the proposal that those relying on the new withdrawal category should be able to select the age at which they retire. However, both the Financial Services Council and ANZ noted that allowing a member to choose the date at which they retire (as distinct from the date at which the application for withdrawal is made) could be confusing and difficult to operationalise. (Financial Services Council)

Comment

Officials consider it would be appropriate for supervisors and managers of KiwiSaver schemes to be able to rely on the judgment of medical professionals in order to determine whether a person meets the requirements for withdrawal under the new category. It would be appropriate for a statement from a registered medical practitioner to be part of the standard process for application as this would allow the supervisor or manager to easily assess whether the person meets the criteria for withdrawal.

Officials agree that the potential separation between application for withdrawal and the date the withdrawal takes place could create some operational challenges.

Recommendations

That the submission be accepted, and amendments made to the information requirements for the application to include a certificate from a registered medical practitioner.

That the submission about the application process triggering the withdrawal of KiwiSaver funds be accepted.

Issue: Operational matters requiring clarification

(Clause 38(2 of Supplementary Order Paper 293))

Submission

(Financial Services Council, ANZ)

The interaction between the new withdrawal category and the existing five year lock-in period would prevent those people subject to the five year lock-in from withdrawing their KiwiSaver funds even if they qualify for a withdrawal under the new category. Both submitters have suggested amendments to ensure withdrawal can take place even for those who are subject to the five year lock-in period.

One submitter asked whether a person can reactivate their KiwiSaver account at a later date if they have made a withdrawal under the new category. The “reactivation” would give the person the ability to return to a “locked-in” status and again become eligible for compulsory employer and government contributions (for example if their health improves). (Financial Services Council)

Comment

A five year lock in period applies to KiwiSaver contributions for people who joined before 1 July 2019. A person that joins before this date is a grandparented member and can withdraw their savings on the later date of New Zealand Superannuation qualification age or the five year grandparenting period. This lock-in period impacts people that joined not long before they turn 65.

In regard to whether a person can “reactivate” their account following a withdrawal under the new category, the purpose of the withdrawal category is to facilitate an early retirement period. Allowing a person the ability to reactivate and “lock-in” their contributions again would be counter to the purpose of facilitating an early retirement by making KiwiSaver funds available.

Recommendations

That the submission about the five year lock-in period be accepted, and amendments made to ensure that a person subject to a five year lock-in period can still withdraw under the new early withdrawal category.

That the submission about whether a person can reactivate their account be noted.

Issue: Clarification of ability to work following withdrawal under the new category

(Clauses 38(2) and (3) of Supplementary Order Paper 293)

Submission

(Financial Services Council, ANZ)

The combination of the clauses relating to a member’s ability to continue in paid employment despite making a withdrawal is inconsistent, with 12B(5) stating a withdrawal does not prevent a person from continuing in paid employment and 13(1C)(a) requiring a statutory declaration stating that the person does not intend to continue in full-time paid employment, or to accept it in the future.

No statutory declaration should be required so that the withdrawal is aligned with a withdrawal that is made at age 65.

Comment

The statutory declaration referred to in clause 13(1C)(a) sets out that the person seeking a congenital condition withdrawal needs to declare that that is the purpose of the withdrawal.

Notwithstanding the requirement in clause 13(1C)(a), if a person chooses to continue in some form of paid employment, clause 12B(5) makes it clear that any contributions made after a congenital condition withdrawal has been made will not receive Crown or compulsory employer contributions for any future contributions to their KiwiSaver account.

Officials consider that the statutory declaration is still required in order to make it clear that the purpose of the withdrawal is for retirement from full-time paid employment. It is also reasonable that a person may want to continue in some form of paid employment as this is consistent with a positive retirement.

Recommendation

That the submission be declined.

Issue: Drafting matters - definitions of life-shortening congenital condition

(Clause 38(2) of Supplementary Order Paper 293)

Submission

(Financial Services Council, ANZ)

There are some inconsistencies with the drafting of the definitions of life-shortening congenital condition.

Comment

Officials agree that the definition of life-shortening congenital condition should be clarified in the drafting to remove inconsistencies.

Recommendation

That the submission be accepted, and the drafting revised.

Issue: Impact of withdrawal on social assistance payments

Submission

(Financial Services Council)

Clarify how a withdrawal under the new category would affect a person’s entitlement to social assistance.

Comment

Under current settings, KiwiSaver funds are no longer locked-in and able to be withdrawn are treated as an available asset for the purpose of social assistance and income earned from that asset is treated as income. This means that unlocking a person’s KiwiSaver account under the proposed early withdrawal category will most likely reduce or stop a person’s social assistance payments.

Work is underway to examine the interaction between early withdrawal of KiwiSaver and entitlement to social assistance and recommendations. Amendments would need to be made to the Social Security Regulation 2018 to change the impact that a withdrawal under the proposed new category would have on a person’s entitlement to social assistance.

Recommendation

That the submission be noted.