2007 enhancements to KiwiSaver include a tax credit for contributions paid by members of a KiwiSaver scheme or a complying superannuation fund.
Sections CX 1B, KJ 1 to KJ 5 and OB 1 of the Income Tax Act 2004; section 68C of the Tax Administration Act 1994; sections 4, 6, 14, 25, 46, 56, 93 to 94, 128A, 209, 233 and clauses 12, 14 and 17 of Schedule 1 of the KiwiSaver Act 2006; section 35 of the Superannuation Schemes Act 1989; and the schedule to the Goods and Services Tax (Grants and Subsidies) Order 1992.
The government announced a set of enhancements to KiwiSaver in Budget 2007. The enhancements include a tax credit for contributions paid by members of a KiwiSaver scheme or a complying superannuation fund. The Act also makes a number of technical amendments relating to KiwiSaver and the complying superannuation fund rules.
The Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill was also introduced into Parliament on 17 May 2007. The bill introduced further Budget announcements, including the KiwiSaver employer tax credit and compulsory employer contributions. The bill received its first reading on 17 May and was referred to the Finance and Expenditure Committee for consideration. It is expected to be enacted by the end of the year.
Member tax credit
From 1 July 2007, people who contribute to a KiwiSaver scheme (or a complying superannuation fund)1 will be eligible for a member tax credit that matches the amount of their contribution to the scheme up to $1,042.86 a year ($20 a week). The member tax credit applies to contributions received by the scheme in the member credit year (1 July to 30 June).
The tax credit will be available to employees, the self-employed and other people who are not employees, such as beneficiaries. Employer contributions and contributions withdrawn under a mortgage diversion facility do not count for purposes of the member tax credit.
Eligibility for the member tax credit
The tax credit will be available to:
- members of a KiwiSaver scheme or a complying superannuation fund; and
- who are 18 years of age and over; and
- whose principal place of residence is in New Zealand; or
- who are government employees who are living outside New Zealand; or
- who are working overseas as a volunteer or for token payment for a charitable organisation named in the Student Loan Act regulations.
A person's principal place of residence is considered to be the main (principal) place where the person resides or their main abode. That is, one's home or dwelling place - the place where one lives. "Home" is defined in the Shorter Oxford Dictionary as "the fixed residence of a family or household, one's own house, the dwelling in which one habitually lives or which one regards as one's proper abode". In Geothermal Energy Ltd v CIR  2 NZLR 324, Justice Beattie stated that "home" "...is simply the location of what for the present constitutes the centre of gravity of the domestic life of the taxpayer - the axis around which his domestic life revolves". This suggests that it is where the member normally lives.
In order for a member of a KiwiSaver scheme or a complying superannuation fund to receive the total member tax credit of $1,042.86 a year, they must satisfy the eligibility criteria each day of the member tax credit year.
Elaine joins KiwiSaver on 1 April 2008, 91 days before the end of the member credit year (30 June 2008). Elaine makes contributions to her KiwiSaver scheme during this 91-day period totalling $2,000. To work out Elaine's member tax credit entitlement for the 2007-2008 member tax credit year the formula is:
Number of days Elaine has been a member of KiwiSaver during the member credit year divided by 365 multiplied by the lesser of either the:
91 divided by 365 multiplied by $1,042.86 equals $260
91divided by 365 multiplied by $900 equals $224.38
Members of a KiwiSaver scheme or a complying superannuation fund will be ineligible for a member tax credit upon the date of eligibility for fund withdrawal from a KiwiSaver scheme. That is, the later of:
- reaching the New Zealand superannuation qualification age (currently 65); or
- the date on which they have been a member of a KiwiSaver scheme or complying superannuation fund for five years.
| Example 5 |
Anna joins KiwiSaver on 6 January 2008, the day of her 61st birthday. Anna will be entitled to the member tax credit for the contributions she has made to her KiwiSaver account until 6 January 2013, the day on which she will have been a member for five years (that is, the date of eligibility to withdraw funds).
Payment of the member tax credit
The superannuation provider will claim tax credits annually (on 30 June) on behalf of individual members. However, it can also claim a part-year tax credit for those who stop being a member of KiwiSaver or a complying superannuation fund during the year. When it receives the tax credit, the provider will apportion it across the investments the member has subscribed to or been allocated. If the person involved is a member of both a KiwiSaver scheme and a complying superannuation fund (or a member of more than one complying superannuation fund), the amount of the credit will be apportioned between the schemes on the basis of the contributions made to each.
Withdrawal of the member tax credit
Withdrawal of the member tax credit will be permitted in the following circumstances:
- the later of the date of eligibility for New Zealand Superannuation (currently 65 years) or five years' membership in a KiwiSaver scheme;
- in cases of serious illness; and
- upon death, to the member's estate.
Withdrawal of the member tax credit will not be permitted in the following circumstances:
- to assist with the purchase of a member's first home;
- for purposes of significant financial hardship; or
- to help with mortgage repayments (mortgage diversion).
If members permanently emigrate and withdraw their interest, the nominal value of the tax credit, up to the value of their accumulation in their scheme, will be repaid to the government. There is no requirement to withdraw from a KiwiSaver scheme upon permanent emigration.
Treatment of tax credit for tax purposes
The member tax credit will be treated as excluded income for income tax purposes. For GST purposes, it will be treated as a non-taxable grant or subsidy.
Miscellaneous amendments regarding the member tax credit
The Act makes associated amendments to the definition of "complying fund rules" in the Income Tax Act 2004 and to section 56 of the KiwiSaver Act (notification of transfers and requirement to transfer funds and information). The purpose of the changes is to ensure that member tax information is transferred when a member transfers to another fund.
The Act incorporates the terms relating to the member tax credit into the KiwiSaver and complying superannuation fund trust deeds. The amendment also ensures that the law relating to this tax credit applies despite anything to the contrary in the trust deed.
The Act provides a transitional measure in relation to prospectuses and investment statements issued before 1 July 2007, to ensure that they remain valid as a result of the new member tax credit. The Act also amends the KiwiSaver Scheme rules in Schedule 1 of the KiwiSaver Act to reflect the member tax credit.
The Act amends the definition of "Crown contribution" to include the member tax credit.
Further KiwiSaver amendments
Employer contributions to KiwiSaver schemes
From 1 July 2007, it will be mandatory for all employer contributions to a KiwiSaver scheme to be paid through Inland Revenue using the employer monthly schedule process. This requirement is to allow Inland Revenue to police the payment by employers of the proposed compulsory employer contribution. The change is being made from 1 July 2007, to minimise compliance costs for employers in having to change systems from 1 April 2008, when the proposed compulsory employer contribution comes into force. Section 94 has been repealed as a result of this requirement.
Complying superannuation fund rules
The Act amends the definition of "complying fund rules" in the Income Tax Act 2004 and section 35 of the Superannuation Schemes Act, to ensure that the rules for complying superannuation funds apply to superannuation schemes (or sections within schemes) that are defined contribution schemes in nature, as intended.
The Act clarifies how the KiwiSaver Act applies to government employees who are serving outside New Zealand. KiwiSaver will apply to them only if they are employed under New Zealand terms and conditions and if it is lawful to offer KiwiSaver membership in the jurisdiction they are serving in. Furthermore, the amendment to section 14 will exclude government employees working overseas from the automatic enrolment rules.
The Act amends the definition of "permanent employees" in section 25 and section 46, to exclude employees who are not subject to the automatic enrolment rules. As a result, employers will be:
- eligible to be an exempt employer even though some employees who work overseas are not able to join; and
- able to choose a KiwiSaver scheme to which all new permanent employees will be allocated, even though some new permanent employees who work overseas are not able to join.
A government department will not be excluded from being an exempt employer because they have some employees who are living overseas in a jurisdiction where offers of membership to KiwiSaver may be unlawful.
The amendments relating to the member tax credit and employer contributions to KiwiSaver schemes come into force on 1 July 2007. The amendments relating to government employees and the complying superannuation rules came into force on the date of enactment, 21 May 2007.
1A complying superannuation fund is a section within a registered superannuation scheme that has been approved by the Financial Markets Authority as having met certain criteria, such as those relating to KiwiSaver lock-in rules and portability.