Extending the KiwiSaver tax exemption to other registered schemes

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Questions and answers

Tuesday, December 12th 2006, 10:54AM

What is SSCWT?

SSCWT stands for specified superannuation contribution withholding tax. It is a tax on any monetary contribution to a superannuation fund that is paid by the employer for an employee’s benefit.

Employer contributions made to a superannuation fund are subject to SSCWT. It differs from tax on employee superannuation contributions, which is normally subject to tax at personal marginal tax rates.

What is the KiwiSaver SSCWT exemption?

The KiwiSaver SSCWT exemption was introduced to encourage employers to contribute to their employees’ savings for retirement. The exemption allows employees’ balances to grow quicker, without being reduced by tax. Under the exemption, employer contributions to a KiwiSaver scheme are exempt from SSCWT, subject to a cap – the lesser of the employee’s contribution or 4% of the employee’s salary or wages.

For example, if the employee and the employer each contribute 4% to a KiwiSaver scheme, SSCWT will be exempt on all 4% of the employer’s contribution. If an employee contributes 2% to a KiwiSaver scheme and an employer 3%, there will be no SSCWT on 2% of the employer contribution. (The remaining 1% would have SSCWT.)

How is the exemption being extended?

The exemption is being extended to include employer contributions to other registered superannuation schemes, subject to the same cap as the KiwiSaver SSCWT exemption. The change will apply from 1 July 2007 – the date that KiwiSaver is launched and the KiwiSaver SSCWT exemption applies.

Why is the SSCWT exemption being extended?

Limiting the exemption to KiwiSaver schemes would make KiwiSaver a tax-preferred investment, thus creating distortions. That would create a risk that existing employer-sponsored superannuation schemes would wind up, leading to the distribution of savings from those schemes. Anecdotal evidence suggests that some members would spend their savings rather than reinvest them in similar retirement savings vehicles. That would be counter to the government’s objective of increasing savings.

How will the extension work?

For employer contributions to be exempt from SSCWT, the following conditions must be met:

• The registered superannuation scheme must be a defined contribution scheme with at least 20 non-associated members.
• The scheme must be registered as at 1 July 2007.
• As a minimum, the KiwiSaver lock-in rules relating to withdrawals will apply, and more lenient withdrawal provisions will not be permitted. That means lock-in until age 65 or five years of membership, whichever is the later, except for:
• first home ownership;
• significant financial hardship;
• serious illness; or
• permanent emigration.
• The minimum contribution rate to the locked-in account is 4% of the employee’s gross base salary or wages, and:
  • employer contributions can count towards this;
  and
  • if such contributions count, the contributions have to vest immediately.
• Members cannot borrow against the locked-in amount.
• Contributions (of both member and employer) in the locked-in account are required to be transferred to a KiwiSaver scheme or another approved scheme, if the member ceases to be eligible to be a member of that scheme or otherwise ceases membership.

Employee and employer contributions to which the exemption from SSCWT applies must be locked in. Any contribution over and above the minimum 4% contribution can be subject to the scheme’s normal withdrawal rules. For example, if an employer contribution is 10% and an employee contribution is 10%, then 8% in total will be locked in (4% employee contributions and 4% employer contributions, which are subject to the SSCWT exemption). The remaining 12% could be subject to the scheme’s normal lock-in rules, and the employer’s contribution will be subject to SSCWT.

The exemption for employer contributions is capped at 4% of an employee’s contribution or 4% of the employee’s salary or wages, whichever is less.

The Government Actuary will have to approve a scheme as having met the required criteria to be eligible for the exemption. The scheme will have to provide statistical information, on a regular basis, to the Government Actuary about the funds held in the locked-in accounts.

What is the estimated fiscal cost of extending the exemption?

The cost is estimated to be around $17 million in forgone revenue in 2007/08, increasing to $18 million in 2008/09 and $19 million in 2009/10. These calculations are subject to a number of sensitive assumptions, including an assumption of how many people will avail themselves of the exemption.

Will the SSCWT tax exemption favour just those people on higher incomes who can already afford to save more for retirement anyway?

No. The SCCWT exemption is capped to the lesser of the employee’s contribution or 4% of the employee’s salary or wages.

Why will the SSCWT exemption be capped?

The cap on the tax exemption afforded to employer schemes has been designed to align with the cap on the tax exemption for KiwiSaver schemes. This is to allow for a more level playing field between KiwiSaver and other employer schemes. Putting a cap on the SSCWT exemption reduces the risk of abuse – it is a prudent measure intended to prevent excessive “salary sacrifice” arrangements being entered into for the purpose of reducing someone’s tax liability rather than for saving. In addition, the cap will limit the fiscal cost to the government of the SSCWT exemption.

Won’t the exemption encourage “salary sacrifice”?

The exemption may lead to salary sacrifice arrangements to a degree, but the cap will help ensure that aggressive salary sacrifice arrangements do not occur.

Won’t the exemption encourage employees and unions to increase pressure on employers to contribute to superannuation schemes?

Some employers, employees and unions may wish to discuss the option of employer contributions as part of their normal negotiations over remuneration and work conditions.

Why aren’t contributions made by the self-employed and employees eligible for the exemption?

The tax exemption is on SSCWT, which is not paid by employees or the self-employed.

Why not have a tax exemption for contributions made by the self-employed and employees?

The main reason for the tax exemption was to encourage employers to contribute towards their employees’ savings for retirement. Having a tax exemption on contributions made by the self-employed would be inconsistent with that goal.

Isn’t the government just encouraging the self-employed to structure themselves as companies?

There are many reasons why the self-employed may not want to structure themselves as companies. The government does not think that extending the exemption to them would be the deciding factor in their choice of structures.

Will members of existing schemes be eligible for the $1,000 government contribution and the fee subsidy that applies to KiwiSaver members?

No. Other schemes will have their own features to encourage membership.

Examples

I’m a member of my employer’s superannuation scheme and earn $30,000 a year. I contribute 2% of my salary and my employer contributes an additional 2%. What does the exemption mean for me?

• If your employer’s scheme changes its trust deed to allow members to access the exemption and you elect to have your funds subject to the KiwiSaver lock-in rules, you will be eligible for your 2% employer contributions to be tax-free. The annual benefit to you will be $126 a year (based on a 21 % SSCWT rate).

I’m a member of my employer’s superannuation scheme and earn $50,000 a year. I contribute 6% of my salary, and my employer contributes an additional 6%. What does the exemption mean for me?

• If your employer’s scheme changes its trust deed to allow members to access the exemption and you elect to have your funds subject to the KiwiSaver lock-in rules, you will be eligible for your 4% employer contributions to be tax-free. The annual benefit to you will be $660 a year (based on a 33% SSCWT rate).

I’m a member of my employer’s superannuation scheme and earn $80,000 a year. I contribute 4% of my salary, and my employer contributes an additional 4%. What does the exemption mean for me?

• If your employer’s scheme changes its trust deed to allow members to access the exemption and you elect to have your funds subject to the KiwiSaver lock-in rules, you will be eligible for your 4% employer contributions to be tax-free. The annual benefit to you will be $1,056 a year (based on a 33% SSCWT rate).

« Further help for saving as KiwiSaver tax exemption extended

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