A number of changes have, and will be, taking place with KiwiSaver. So let’s recap and look at what is on the horizon.
Since 1 June 2011, the Government’s contribution (known as the Member Tax Credit) has been reduced from $1 to 50c for each $1 contributed by the individual KiwiSaver members. The Government’s maximum contribution is now $521.43 per year, compared to the previous maximum of $1,043.
From 1 April 2012, ESCT (employer superannuation contribution tax) needs to be deducted from all employers’ cash contributions to KiwiSaver accounts. The rate of ESCT will be the employee’s marginal tax rate. Marginal tax rates range from 10.5% – 33% for the 2012 income year. Previously no ESCT was required to be deducted from employers’ contributions. This is therefore a significant change you should be aware of.
This will reduce the employer’s contributions actually credited to the individual employees’ KiwiSaver accounts and, with the reduced Government contribution, it is likely KiwiSaver will become less attractive than originally set up – but it may still be a worthwhile savings plan.
There are also proposed changes to KiwiSaver in 2012. In particular, it is proposed the minimum employee and employer contribution rates will increase from 2% to 3% from 1 April 2013. These proposals are currently in a tax Bill before Parliament.
Whilst there is arguably no direct impact on businesses for the time being, we may see some pressure from the labour force – particularly if the labour market tightens – for employers to pick up the shortfall. This, coupled with the Working for Families allowance cuts, will undoubtedly add to the cost base for small businesses and it may be difficult to pass this cost on.
We await the release of Budget 2012 in May to see whether there are any further changes.
I REALISE THERE ARE TWO WAYS TO HANDLE THIS – IF WE PROCESS THIS THROUGH WAGES, HOW IS THIS HANDLED – DO WE PAY THE FULL EMPLOYER CONTIBUTION THE NORMAL WAY, BUT DEDUCT THE ESCT IN THE FORM OF PAYE? E.G AN EMPLOYEE NORMALLY PAYS $447.80 IN PAYE AND 2% IN KIWISAVER,WOULD I INCREASE THE PAYE OR SHOW THE ESCT AS A SEPARATE DEDUCTION? WOULD THIS LIKELY TO BE THE EASIEST WAY TO HANDLE SUBJECT TO EMPLOYEE ACCEPTANCE?
Cherry Douglas Hi Flo Pumpsreply
In response to your question, the PAYE is not increased, rather the ESCT is shown as a separate deduction as explained below.
The actual calculation of ESCT will depend on each employee’s employment agreement in particular, whether the employer is locked in to an employment agreement where they contribute a set percentage of the employee’s salary (in which case it would be necessary to gross up the employer contribution so the employee receives their full entitlement), or whether the employer has agreed to contribute a set percentage less ESCT:
1. Where the Employer’s contribution is a locked-in amount after deducting ESCT
For example, if the amount paid in Employer contribution for an employee is $50 excluding ESCT, $50 would be returned as Employer contribution on the Monthly Employer schedule (IR348) column 7 and ESCT would be calculated using the applicable ESCT rates and returned as an ESCT deduction on the Monthly Employer deductions form(IR345). Therefore the amount paid would be $50 plus ESCT.
2. Where the Employer’s contribution is a maximum amount (i.e, contribution is a set percentage less ESCT)
For example, if the total monthly Employer contribution for an employee is $50 including ESCT, ESCT is calculated on $50 using the applicable ESCT rates and the residual amount of the contribution is shown in the monthly employer schedule (IR348) as employer contribution column 7 and the ESCT is shown separately on the Monthly Employer deductions form (IR345) in Box 8. Both amounts total the maximum $50 amount.
I hope this is of assistance to you. Please do not hesitate to contact us directly for any further clarification on the application of the new ESCT rules.
The author replies
An employer also has the option to gross up ESCT leaving the employee contribution at the full 2%