Employer contributions made to a workplace savings scheme under the Financial Markets Conduct Act 2013 or a KiwiSaver scheme are taxed under the ESCT regime. Under this regime, the level of tax payable depends on the level of the contribution, the remuneration level of the employee and when the employee commenced service.
Employers wishing to contribute to an employee’s retirement can also contribute to a non-registered superannuation scheme. However, as this is subject to the FBT regime, it is not an option an employer would normally take. Likewise, the employer could simply pay the employee a higher wage/salary and let the employee contribute themselves as a personal contribution. Such additional payments would be subject to the PAYE regime. This may be administratively convenient, but is not as efficient from a tax point of view.
Where ESCT is payable, the ESCT tax rate applicable to an employee depends on whether the employer adopts the flat 33% rate, or the variable rate. Under the variable rate basis, the ESCT tax rate is based on the employee’s last dollar of their total relevant remuneration. The “relevant remuneration” depends on when the person started employment, how much is earned from that employer and how much the employer contributes to a KiwiSaver or non-KiwiSaver superannuation scheme. The current tax rates (1 April 2014) are:
|Relevant remuneration level2||ESCT rate|
|$0 to $16,800||10.5%|
|$16,801 to $57,600||17.5%|
|$57,601 to $84,000||30.0%|
Note: 2“Relevant remuneration” includes taxable pay + total employer contributions for the employee.
If the employee was employed by the employer for the full previous financial year (i.e. 1 April to 31 March), the relevant remuneration is the taxable income earned in that previous year, plus the gross amount the employer paid to superannuation scheme(s) and KiwiSaver for that employee in the year. For these employees, it does not depend on their current years’ remuneration.
If the employee was not employed for the full previous financial year, the relevant remuneration is the employer’s reasonable estimate of what will be paid by the employer to the employee in the current financial year, along with the expected gross employer contribution to superannuation scheme(s) and KiwiSaver.
In both cases, only income/superannuation contributions paid by that employer are included. That paid by unrelated employers is excluded.
For example, if an employee earns $38,000 p.a. and receives a gross employer contribution of $3,800 (i.e. 10%) and worked for the full year, then:
If the same employee was employed on 1 February, the relevant remuneration that year is the estimated income, i.e:
2/12ths x $41,800 = $6,967
The ESCT rate is therefore 10.5% in the first part year to 31 March and 17.5% in the next year.
Also, unless the tax rates change, an employee’s ESCT rate only changes on 1 April each year.
It is worth noting that employer contributions to non-KiwiSaver schemes that need not be locked in, are tax favoured for some employees who fall into the overlaps between the PAYE range and the ESCT range (i.e. between $14,000 and $16,800, $48,000 and $57,600, $70,000 and $84,000). ESCT is the same or less than the equivalent PAYE rate.