Download as PDF

This paper summarises the tax regime that applies to registered superannuation schemes in New Zealand and separately for approved KiwiSaver schemes.

Registered superannuation schemes

In simple terms, contributions to a registered scheme are taxed when paid to the scheme or paid out of after-tax income; investment income on the contributions is taxed while they are in the scheme and benefits are paid tax-free. This is known as the TTE (taxed, taxed, exempt) regime.

Each of these is looked at below.

Employee contributions

Contributions paid by employees are from their after-tax income. Such contributions have therefore been taxed at the employee’s marginal tax rate, under the PAYE system, of 12.5%, 21%, 33% or 39% depending on their income level (or a mix, if the employee’s contributions cross an income band).

Employer contributions

In contrast to an employee’s contributions, where an employer contributes to a “registered superannuation scheme”, it must pay “employer superannuation contribution tax” (ESCT) - previously, “specified superannuation contribution withholding tax” (SSCWT).

At the employer’s option, the rate of ESCT can:

• reflect the employee’s marginal rate of tax on their direct taxable pay (“the multi-rate approach”) but with a maximum rate of 33%; or
• be at a flat 33% (the “fixed rate”).

This is an employer decision and can be made on an employee by employee basis. 

The employer is obliged to calculate and pay the ESCT to the IRD.  It then pays the scheme the net amount.  The scheme has no legal obligations with respect to ESCT.  An example shows how this works:

The ESCT rate under the multi-rate approach depends on the total of the employee’s “taxable pay” from the employer and the contributions paid by the employer to a superannuation scheme or to KiwiSaver.  The maximum ESCT rate is 33%.

The multi-rate ESCT rates are:

The “taxable pay plus employer contributions”, for an existing employee, is based on the amount paid by the employer in the last full financial year.  A financial year is the period 1 April to 31 March.  For a new employee, or for an employee who joined in the last financial year, it is based on an estimate for the current financial year.  This is not an “annual rate”.  It is the estimate of the actual taxable pay and employer contributions that will be paid in the current year.

The relevant taxable pay plus employer contributions are:

Only the taxable income earned from the employer counts.  Income from all other sources, including other unrelated employers and investment income, is ignored.

 Back to top

Salary sacrifice

Where an employee contributes to a scheme via salary sacrifice, the contributions paid are then “employer contributions” and taxed as employer contributions.  The ESCT rate under the multi-rate approach is based on the employee’s actual taxable pay and employer contributions before salary sacrifice i.e. the employee’s taxable income assuming no salary sacrifice contributions.

 Back to top

Benefit payments

Benefits from a registered scheme are paid tax-free. However, if a member on a marginal tax rate of 39%, or one who would be if there were no “salary sacrifice”, withdraws a benefit funded by employer contributions, tax can be payable as “fund withdrawal tax” (FWT). If payable, it is 5% of the benefit attributable to the employer’s contributions.

For FWT purposes, there is no distinction between salary sacrificed contributions and normal contributions paid by the employer. FWT potentially applies to both.

FWT is intended to limit tax avoidance for 39% taxpayers who are under-taxed in respect of the employer’s contributions under the ESCT regime. There is a list of exceptions to the application of FWT that, generally, can exempt most benefits paid on leaving service.

Benefit payments do not affect a person’s entitlements to New Zealand Superannuation.

 Back to top

Investment income

The investment income of a scheme is taxed within the scheme. Investment income allocated to members’ accounts or to fund members’ benefits raises no tax liability in the hands of the member. If the scheme is not a portfolio investment entity (PIE), the tax rate is a flat 30%.

If the scheme is a PIE, the investment income is taxed on a member by member basis, at the member’s prescribed investor rate (PIR). A member’s PIR is either 19.5% or 30% depending on their “taxable income”. In simple terms, if a member’s taxable income in either of the previous two financial years was below $38,000 their PIR may be 19.5%, otherwise it is a 30%. It is not however that simple, as there is a second test that their taxable income and their income from their PIE investments must also be below $60,000.

From 1 April 2010, the 19.5%/30% becomes 12.5%/21%/30%, the $38,000 becomes $48,000 and the $60,000 becomes $70,000.

What constitutes the taxable investment income of the scheme also depends on whether the scheme is a PIE. If it is not a PIE, the tax regime is the standard New Zealand capital/revenue regime with FDR for overseas shares.

If it is a PIE, the taxable income is the same capital/revenue/FDR regime for all investments except certain Australasian shares. Under a PIE, Australasian shares are taxed on dividends only and capital gains/losses are tax free.

 Back to top

KiwiSaver

A KiwiSaver scheme is not a registered superannuation scheme. However, the tax regime for KiwiSaver schemes is the same as that for registered schemes except for employer contributions.

Employer contributions to KiwiSaver are not subject to ESCT for the first 2% of the employee’s total taxable pay. Employer contributions above this level are subject to ESCT. Employees must be saving 2% to get the exemption (i.e. the minimum employer contribution rate).

Members receive a “member tax credit” from the government for their KiwiSaver contributions of $1 for $1, up to $1,042.86 a year ($20 a week). The member tax credit is paid at the end of each year ending 30 June, and is credited to the member’s KiwiSaver account. It is important to note that the member tax credit is not a tax credit, but a subsidy paid to KiwiSaver.

 Back to top