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Minimise Tax, Maximise Savings

Practical ways to avoid the 39c tax rate.

Tuesday, April 3rd 2001, 7:05PM


There's a well defined group of post-war baby boomers moving through the population and reaching retirement increasingly in the next 10 - 15 years. This is a world wide phenomenon, and will continue through until 2050. In countries where an age pension is payable it'll provide those Governments with varying degrees of challenge to meet the funding from a shrinking group of taxpayers.

Life expectancy will increase for this group which will mean spending longer in retirement. The boundaries of expectations for this segment of the population will expand in a way they have never been expanded before ! They anticipate maintaining some sense of the lifestyle they have enjoyed up until now, in a more lengthy, active and enjoyable retirement than any of their predecessors have previously enjoyed.

And it is into this setting that in April 2000 the Government introduced a new personal top tax rate of 39% for annual income over $60,000. As is often the case when changes are made, it created a number of anomalies. One of these was with Specified Superannuation Contribution Withholding Tax - SSCWT - the tax applicable to employer contributions made to registered superannuation schemes. This tax is applied at a flat rate of 33%.

This 'anomaly' spawned an opportunity to create a small tax incentive for those most able to save, those earning greater than $60,000 ! I was part of the group that worked with Government to achieve this opportunity, and today I'm going to talk to you about just what that opportunity is.

If you have employees paying the 39% marginal tax rate, then there are now potential tax savings available if those employees also save through a registered superannuation scheme.

Tax savings can be gained in two ways:

  1. The employer contributes to the scheme on behalf of the individual employee. Employer contributions to a superannuation scheme are taxed at 33% whereas tax on contributions paid by an employee earning more than $60,000 per annum will be taxed at 39%. Not hard to see that there is an immediate 6% advantage.
  2. The second new advantage to being a member of a registered superannuation scheme for $60,000+ taxpayers is the opportunity to have investment earnings taxed at 33% rather than at the Resident Withholding Tax rate of 39%.

79,680 taxpayers are currently gifting the Government up to 6% of their earnings because they do not know how to tackle this subject with their employers.

As the provider of the largest employer sponsored superannuation Master Trust in New Zealand, AMP has received numerous requests from employers and employees, asking how they can best utilise this opportunity. The Government has not spelled the changes out.

For those of you with an existing superannuation savings facility available to staff - it is a simple process, and your provider is able to offer you professional advice - probably for free - on just how you can achieve this. For those of you who don't provide access to a workplace savings facility, then these benefits, and an extension to all marginal tax groups, which is currently under consideration by Government, may lead you to reconsider your position.

So, given that access to a registered superannuation scheme exists, how does an employee on the 39% marginal tax rate organise their savings to receive the 6% benefit on both contributions and investment earnings ?

The answer is for employees like you and me to forgo receipt of a specified amount of our fixed pay package, and instead, have it paid into a superannuation scheme by our employer. This arrangement is commonly called salary sacrifice.

Where an employer pays salary that has been sacrificed into an employee's superannuation scheme, it creates a tax advantage for the employee that they can't match themselves. The more they pay in the more the employee saves - both in savings and in tax.

For example, for every $1,000 of contributions deposited in a registered superannuation scheme by an employer (net of tax), the member receives $89 more than if they had deposited the money themselves. Here's the scenario in detail:

Employee Pays Contribution

Employee Pays Contribution


Gross contribution
Less super tax @ 33%
Super contribution





Gross contribution
Less tax @ 39%
Super contribution



Interestingly, using this example, for the employee to achieve the same super contribution, they would have to start with a gross contribution of $1,639 - $146 more !

Employee Contributes $1000

Employee Contributes $1000


Gross contribution
Less super tax @ 33%





Gross contribution
Less SSCWT @ 39%



To take this a step further - an employee on $75,000 elects to sacrifice 10% of their salary and have it deposited into a superannuation scheme by their employer. This will generate $667.50 per annum more in savings than if they had deposited it themselves.

Not a big amount, granted - but compounded over say a 10 year period and attracting additional investment earnings, it creates additional savings of $8605.50 !*

(*Based on a constant $75,000 salary plus investment earnings of 5% net on extra amount saved.)


The same tax saving can be used to increase the amount of disposable income for an employee who is saving in a registered superannuation scheme.

For example: An employee is currently saving 10% of their $75,000 income in a superannuation scheme:






Annual salary
Tax @ 39%
Less 10% super




Annual salary
Salary sacrifice
Tax @39%


Disposable income

$ 46,980


Disposable income


The difference is $672 per annum in your pocket or $6,720 over 10 years !

This is a no brainer ! Why would you choose to forgo either extra savings or extra disposable income if the opportunity to do so exists ?


Employees who earn over $60,000 pa.

These employees can increase their savings for the future or maintain the dollar amount being saved and increase their take-home pay. They may:

  • already be in an employer sponsored superannuation scheme;

  • in their own personal superannuation scheme

  • saving outside of a recognised superannuation scheme

  • considering commencing retirement saving

AMP has researched this market. Our SuperWatch research tells us that 49% of New Zealanders are saving for their retirement. Currently only about 17% are saving through employer sponsored superannuation schemes.

Employers can also benefit from providing access to superannuation saving. This is an easy and fantastic way for you to recognise your employees.

  • As employers, you are the only vehicle by which employees can gain access to this tax saving advantage. (The advantage cannot be achieved without the consent and participation of the employer.)

  • A good super scheme helps retain staff - it's an especially important when looking to retain qualified staff with specific skills.

  • Demonstrates a commitment to the welfare of the staff member as an individual. (Being 'valued' is an important part of staff retention.)

  • When combined with death or disablement cover, provides the employer with a solution to the ethical and moral challenges of cash flows for employees and their dependants when they become disabled, permanently or temporarily or if they die.

  • Helps with goodwill in restructures.

  • Provides a point of differentiation for recruitment. People will choose you over other companies because you offer this opportunity.

  • Benefit valued by employees. - the PA Consulting Salary Survey results published in March 2000 indicated that superannuation provided by an employer was the most popular benefit favoured by employees after salaries and wages. We know New Zealand employees want it !



  • Pay less income tax

  • Increase savings per $ tax paid or increase disposable income

  • Ease of saving through payroll deduction

  • Pay 33% on investment earnings instead of 39%

  • My employer helps me to save.

As you can see, there are clear benefits for employees.

Employers can not only gain an advantage in attracting employees, but they can also gain some financial advantage from offering staff the opportunity to salary sacrifice, for example, lower ACC premiums.


  • ACC Premiums & Benefits

  • Bonuses to staff

  • Income Protection Insurance

  • Death or TPD Cover

  • Vesting implications

  • Tax on early withdrawals

  • Access to savings

  • Administration

  • Portability

ACC premiums are calculated on 'total gross earnings'.

Salary that is sacrificed for employer contributions reduces 'total gross earnings' and is not considered gross income under ACC law.

So, if an employee elects to sacrifice a portion of their salary for employer superannuation contributions then -

  • their gross income would reduce by the amount sacrificed

  • your ACC premium reduces accordingly

  • any ACC benefit paid is calculated on the lower figure

Bonuses can be a fixed amount or calculated as a percentage of salary. The 'salary' figure used for calculation of a bonus can include or exclude any amount the employee has chosen to sacrifice. This is entirely at the discretion of the employer.

If you allow your employees to elect to salary sacrifice their bonuses, and pay them as an employer contribution to their superannuation savings, the amount the employee receives increases.

Let's take an employee on a total fixed package of $100,000 with an additional bonus paid at $ 25,000 - not an unusual scenario for a number of senior employees.


Bonus $ 25,000 Bonus $ 25,000

Taxed at 39% $ 9,750 SSCWT $ 8,250

Cash in Hand $ 15,250 Super contribution $ 16,750

An increase of $1500 from the same bonus amount !

You may provide income protection to your employees - a benefit that is highly valued . Significant discounts apply to premium rates for groups of employees compared to the premium we pay as individuals. A benefit like this can protect the employer from being called upon to make ethical and moral decisions on who will or wont be paid during a period of longer-term absence from work by any particular employee.

Income protection insurance is based on a percentage of gross income - usually 75% or 80%. Health professionals have identified that it's in the best interests of the employee if they are assisted to rejoin the workforce as soon as possible after a temporary period of absence. Insurers also recognise this and these days place great emphasis on rehabilitation and assistance to return to the workforce as soon as possible, even on a part time basis. This assists both the employer and the employee.

Where you're providing income protection insurance for your employees, it is important for you to identify what salary basis the benefit is calculated from. The issue is the same as it is with bonuses. Are the premiums paid and benefits received based on the total fixed pay package (including the amount of any salary sacrificed) or on the total gross earnings - as it applies to ACC premiums and benefits? The decision lies with the employer.

Alternatively, employees may have their own individual income protection policies.

In the case of personally owned income protection policies, it's the employees responsibility to check that they and their insurer are clear on what constitutes 'salary' - the basis upon which premiums are calculated and benefits received.

Covering your employees for Death, TPD or Trauma Cover is the most common benefit provided by employers for their staff and one that employees increasingly expect to receive with employment. Benefits are usually based on a multiple of salary.

You need to make a decision on what 'salary' definition is used in your insurance policy. As with other insured benefits, this has a direct bearing on the calculation of premiums and affects the basis upon which benefits are calculated and paid.

For example:

While Trauma Cover usually equals 1-x salary, Death or TPD benefit for employees can often equal 3-x salary or more. 

Employee on $100,000 elects to salary sacrifice $20,000 per annum.

Benefit based on total fixed package (3 x $100,000) = $ 300,000

Benefit based on total gross earnings (3 x $80,000) = $ 240,000

VESTING - the Good, the Bad and the Ugly
Vesting has been designed to assist employers with staff retention. The longer the employment the greater the portion of employer contributions which pass to the employee in the staff superannuation scheme.

Changing work patterns has seen the average term of employment in steady decline, driven by globalisation and technology. Some vesting scales are struggling to keep up.

Modern superannuation schemes rarely have a vesting period greater than 5 years - but some still operate in New Zealand with vesting scales of 20 years or more. If vesting is designed to attract and reward employees, then some employers have some work to do to bring their vesting scales into line with common practise and ensure it's value is maintained.

Where salary sacrifice is offered, it is advisable to consider immediate vesting of the amount sacrificed - irrespective of the period of vesting that applies to other employer contributions. If the employee leaves the company before the employer contributions are fully vested, then at least the full amount of the salary sacrifice contributions are not at risk.

If the vesting rules that apply to other employer contributions are applied to salary sacrifice contributions, then this raises the possibility of the employee permanently foregoing salary.

( In other words, only a portion of monies sacrificed will be received if the vesting period has not elapsed. The balance goes into the scheme's Reserve Account.) The reality of this could, on resignation, result in the employee wanting to review the whole arrangement retrospectively. And this may not result in resolution to the satisfaction of both parties !

Administratively, the best solution is:

  • to provide a separate account into which sacrificed salary contributions can be held

  • immediate vesting

  • no access to funds during employment, except for cases of hardship.

In this way the salary sacrifice portion is visible and vesting does not imperil eventual receipt of the proceeds. The longer the existing vesting scale the more attractive such a proposition becomes. After all, the purpose of the tax advantage is to encourage us to save. Employers or superannuation trustees don't want to be dealing with aggrieved employees on resignation when they suddenly realise they will not receive monies that, had they not sacrificed them, would have been theirs as of right - irrespective of what information they received at the time the decision to salary sacrifice was made.

There is good professional advice available in the market to allow you to structure this part of your superannuation scheme without undue complication or cost.

Of course, if the employer is contributing to an employee's personal superannuation scheme, no vesting issue arises. However freedom to operate one's own superannuation facility is balanced by a tax penalty if funds are withdrawn early. The same penalty applies to early withdrawal from employer sponsored schemes.

As I've already mentioned, a tax penalty applies to early withdrawals of employer contributions. This is primarily designed to curb any attempt to use superannuation schemes for tax avoidance purposes. That said, there are no tax implications on withdrawal of funds from a defined benefit scheme.

Defined benefit schemes operate on the principle of unallocated funding and in the main provide members with a pension based on a pre-determined equation of salary, years employed, final salary etc.

However, the majority of employer sponsored superannuation schemes these days, are defined contribution schemes, not defined benefit schemes. These deliver the member a lumpsum equivalent to their own savings plus the investment income these savings have attracted, and the vested portion of the Employer Account.

The same tax implications apply whether salary is being sacrificed to a personal superannuation scheme or an employer sponsored defined contribution scheme.

In certain circumstances, to prevent tax avoidance, there is a 5% fund withdrawal tax payable on employer contributions and the investment earnings they have earned. If employees earning more than $60,000 withdraw such contributions within 2 years of their deposit, they are considered to be attempting to unfairly benefit from the difference between the higher personal tax rate of 39% and the employer contribution withholding tax rate of 33%.

Broadly speaking, the tax does not apply on cessation of employment if:

  • the member has been employed for two or more years; and

  • employer contributions have not increased by more than 50% in the current year and the two preceding income years.

Should the fund withdrawal tax apply to a withdrawal, the member can elect to defer receipt of the benefit until such time as tax is no longer payable (up to 2 years) or transfer to another superannuation fund until the liability period has elapsed.

Should a tax liability become payable, the member is no worse off (in fact they're slightly better off) than if they had not elected to salary sacrifice.

The only situation that could place an employee in a worse position is if the employer contributions cannot be identified, in which case the tax liability is calculated on both the member and the employer contributions and the investment income these monies have earned. In all probability, the only real likelihood of this occurring is if employer contributions are paid into a personal superannuation scheme and the member or the employer is unable to identify the value of their contributions.

Any fund withdrawal tax liability is payable by the superannuation fund from which it occurs. The superannuation fund in turn is able to deduct the tax from the individual member's funds or withdrawal amount.

I've gone into a bit of detail here. I don't expect you to remember all this, as it does sound a bit techo. Obviously there is a wealth of expertise available to you at little or no cost to help you work through or create this opportunity for your employees.

For most employer sponsored superannuation schemes, no access to Employer Account funds is available during employment.

Where access is provided, careful consideration must be given before using funds that may incur a tax liability. I suggest that a member be offered professional advice before such a withdrawal takes place, so that they are fully conversant with their options.

It could be that a withdrawal from their Member Account, where no tax liability applies, would be a better option.

The short answer is 'Yes' - but you may want to preserve it - and, keep saving.

In today's employment environment where the demand for skills is changing, an important aspect of any superannuation scheme is its portability.

To get the most benefit from retirement savings efforts, and particularly if you are saving through salary sacrifice, it is important to have the ability to choose to either:

  • remain in your scheme on cessation of employment

  • transfer to another employer sponsored scheme

  • transfer to your own personal retirement savings scheme.

This provides:

  • continuity of investment

  • limited risk in exiting and then re-entering the investment market

  • consolidated savings

  • lower costs

  • less hassle

  • no fund withdrawal tax liability


While offering employees who genuinely wish to save, the benefit of utilising this tax advantage to sacrifice salary, employers need to be mindful of a few administrative tasks.

  • Individual contracts may need to be reviewed and changed.

  • You may need to amend the definition of 'salary' or 'employer contribution' in your superannuation trust deed.

  • Payroll procedures may need to change

  • Employees will need access to good advice before electing to sacrifice salary

It's a good idea to allow employees to review the amount of salary they have elect to sacrifice from time to time. Perhaps annually. This allows the employee some flexibility. It also allows the employer to manage the process efficiently.

Currently this provision does appear somewhat elitist. There is no tax advantage for 1,058,600 New Zealanders who earn less than $60,000, to sacrifice salary. But we do have a Labour/Alliance Government and there is an expectation that they will accord their traditional constituency with at least the same tax advantage as taxpayers in the 39% marginal tax group.

In speaking to the International Fiscal Conference in Christchurch in March this year, Michael Cullen said " My view is that the tax system could do a lot more to encourage people to save for retirement, and this year I intend to foster an informed policy debate on the matter."

Some taxpayers are being whacked for tax on their savings. Remember that superannuation scheme members in the 19.5% marginal tax bracket have their employer contributions and investment income taxed at the flat rate of 33%. Hardly an incentive to save!

And New Zealanders urgently need to recognise the need to save. Interestingly, AMP's SuperWatch survey data shows 92% of New Zealanders expect to take some responsibility to provide for themselves in retirement and 74% believe they have the greatest responsibility to provide for themselves in retirement.

We have a well identified group of post-war baby boomers moving through the population and starting to reach retirement in increasing numbers over the next 10 - 15 years. This phenomenon will continue through to 2050 - providing future Governments with a challenge to fund New Zealand Superannuation from a shrinking group of taxpayers, balanced against the large number of superannuitants who will become an increasingly powerful voting block.

This group have increased life expectancy, so will spend longer in retirement than any other group in history. They also have an expectation to enjoy their retirement and are likely to want to maintain some sense of the lifestyle they have enjoyed in the last 40 years. They won't be able to do that on $208 per week (the New Zealand Superannuation benefit for a retiree who is single and sharing facilities) !

You will not be surprised to know that IRD and Treasury are not pre-disposed to offering a 6% tax advantage across the board to savers. They don't like the way the figures look. Yet, the need to save for retirement is more compelling now than ever. Why should 1,058,600 taxpayers in the other marginal tax groups not receive the same equity of opportunity as those on $60,000 plus?

A reduction in tax payable on employer contributions from a flat 33% to 19.5% for members of superannuation schemes in that marginal tax group may be offered instead. In the interests of encouraging New Zealanders to save, and as a simple issue of equity, we're looking for a bit more than this!

Whatever the outcome, legislation is likely to be drafted this year with enactment in 2002.

The more attractive the tax advantage, the more likely it will be that employees will be looking to employers to provide them with access to a savings facility.

This speech was delivered by Linda McCulloch, Manager Corporate Markets, AMP Financial Services, 3 April 2001.

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