This paper summarises the tax regime that applies to workplace savings schemes and KiwiSaver schemes in New Zealand.
Workplace savings scheme under the Financial Markets Conduct Act 2013
Contributions to a workplace savings scheme under the Financial Markets Conduct Act 2013 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.
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 10.5%, 17.5%, 30% or 33%, depending on their income level (or a mix, if the employee’s contributions cross an income band).
In contrast to an employee’s contributions, where an employer contributes to a “workplace savings scheme under the Financial Markets Conduct Act 2013”, it must pay "employer superannuation contribution tax" (ESCT) . The net amount is paid to the scheme.
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”), 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 with PAYE payments. It then pays the scheme the net amount. The scheme has no legal obligations with respect to ESCT. An example shows how this works:
|Net contribution||$67||(to scheme)|
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 and to KiwiSaver. The maximum ESCT rate is 33%.
The multi-rate ESCT rates are:
|Taxable pay plus employer contributions||ESCT rate|
|$16,801 - $57,600||17.5%|
|$57,601 - $84,000||30%|
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:
|Starts employment||Taxable pay plus employer contributions|
||current year estimate|
||current year estimate|
||actual previous year|
Only the taxable income earned from the employer counts. Income from all other sources, including other unrelated employers and investment income, is ignored.
Where an employee contributes to a scheme via salary sacrifice, the contributions paid are treated as “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.
Benefits from a workplace savings scheme under the Financial Markets Conduct Act 2013 are paid tax-free. Also, benefit payments do not affect a person’s entitlements to New Zealand Superannuation.
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 28% in most cases.
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, 10.5%, 17.5% or 28%, depending on their “taxable income”. In simple terms, if a member’s taxable income in either of the previous two financial years was below $48,000 their PIR may be 10.5% or 17.5%, otherwise it is a 28%. 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 $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.
A KiwiSaver scheme is not a workplace savings scheme under the Financial Markets Conduct Act 2013. However, the tax regime for KiwiSaver is the same as that for workplace savings scheme under the Financial Markets Conduct Act 2013.
Members receive a “member tax credit” from the government for their KiwiSaver contributions of $1 for each $2 they save, up to $521.43 a year ($10 a week). The member tax credit is paid after 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 by the government.