Compulsory employer contributions
Subpart 3A of Part 3 of the KiwiSaver requires employers to make contributions for employees who have deductions for KiwiSaver or CSF from their salary or wages.
New Subpart 3A of Part 3 of the KiwiSaver Act (sections 101A to 101K) requires an employer to make an employer contribution for each employee who has deductions for KiwiSaver or CSF contributions from his or her gross salary or wages. This requirement will be phased in as follows:
|From|| Employer compulsory contribution rate as |
a percentage of gross salary or wages
|1 April 2008||1%|
|1 April 2009||2%|
|1 April 2010||3%|
|1 April 2011||4%|
Existing contributions will count towards the compulsory amount in certain circumstances to prevent employers already making employer contributions to existing registered superannuation schemes from having to make additional compulsory employer contributions.
New section 101B provides rules relating to who should bear the cost of the compulsory employer contributions. In the first instance, compulsory employer contributions will be paid in addition to the employee's gross salary or wages as an additional payment (benefit) on top of existing remuneration. However, from 13 December 2007, employers and employees (or unions) may negotiate as to how compulsory employer contributions will be funded, provided any final agreement is an outcome of good faith bargaining.
General rules for compulsory employer contributions
New section 101A requires employers to pay a compulsory employer contribution for employees if they meet the requirements set out in section 101C (employee requirements).4 The requirements are that employees are:
- paid salary or wages from which the employer deducts, or is required to deduct, contributions for their KiwiSaver scheme or CSF;
- aged 18 and over;
- not entitled to withdraw an amount from their KiwiSaver scheme or complying fund under the scheme rules that require lock-in (that is, the age of eligibility for New Zealand superannuation or five years of membership, whichever occurs later); and
- not a defined benefit scheme member.
If an employee does not meet any of these requirements, the employer is not required to make a compulsory employer contribution for that employee. This does not prevent an employer making voluntary contributions to an employee's KiwiSaver scheme or CSF if the employee does not meet these requirements.
Employers are required to make compulsory contributions if they are required to make KiwiSaver deductions from an employee's salary or wages. For example, if an employee is subject to the automatic enrolment rules but the employer does not make a deduction of KiwiSaver contributions, the employer is still required to pay a compulsory employer contribution for that employee.
A defined benefit scheme member (defined in section 4 of the KiwiSaver Act) is an employee whose employer makes contributions to an existing registered superannuation scheme that is a defined benefit scheme (the retirement benefits for employees are calculated by reference to their salary or wages). Compulsory employer contributions are not payable for members of defined benefit schemes if:
- the scheme was registered before 17 May 2007;
- the employer provided access to eligible employees before 17 May 2007; and
- the employee was employed by the employer before 1 April 2008 and the employer makes or has agreed to make contributions before that date.
In addition, an employee will be treated as a defined benefit scheme member in the following circumstances (provided that the foregoing requirements are met):
- The scheme is one that succeeds the scheme that has to be registered by 17 May 2007, provided that all relevant members transferred to that scheme by virtue of section 9BAA of the Superannuation Schemes Act.
- If an employee is covered by a collective agreement in force before 17 May 2007 and expiring after 1 April 2008 that requires the employer to make contributions to that scheme.
- If the employee has changed employment and the new employer is required to make contributions to that scheme on the same basis as the previous employer. This would cover the situation where an employee is treated as a defined benefit scheme member but changes employment and the new employer is required to continue to contribute to that scheme for that employee.
Calculation of compulsory employer contribution
New section 101D sets out the rules for determining the amount of the employer contribution. The amount of the contribution payable by an employer is calculated using the following formula:
Payment of salary or wages x CEC rate minus other contributions minus hybrid scheme contributions
The "payment of salary or wages" is the amount of gross salary or wages from which the employer deducts or is required to deduct an employee's contribution to a KiwiSaver scheme or a CSF.
The "CEC rate" is:
- 1 percent if the payment of gross salary or wages is made for a pay period in the year starting on 1April 2008;
- 2 percent if the payment of gross salary or wages is made for a pay period in the year starting on 1April 2009;
- 3 percent if the payment of gross salary or wages is made for a pay period in the year starting on 1April 2010;
- 4 percent if the payment of gross salary or wages is made for a pay period in the year starting on or after 1 April 2011.
The CEC rate for a year applies only if the whole pay period is in the year specified. For example, if a pay period for an employee spans 1 April 2009, then the 1 percent rate will apply for the employer contributions in respect of the payment of salary or wages for that pay period. The 2 percent rate will apply to the next pay period.
"Other contributions" is the total amount that an employer pays (or credits) an employee in relation to payment of gross salary or wages if the amount is:
- an employer contribution made in absence of this section (that is, voluntary contributions to a KiwiSaver scheme or a CSF):
- an employer superannuation contribution made to a registered superannuation scheme if:
- the scheme (or the prior scheme if the scheme is a successor scheme) was registered before 17 May 2007;5
- the scheme provides access to eligible employees before 17 May 2007;
- the employee is employed by the employer before 1 April 2008 and the employer makes or has agreed to make employer contributions before that date, or the employee is covered by a collective agreement that is in force before 17 May 2007 and expires after 1 April 2008 requiring employer contributions to the registered superannuation scheme; and
- the registered superannuation scheme provides that the contributions vest completely in the employee within five years of becoming a member.6
- an employer contribution in relation to an employee who is a member of Parliament, a judicial officer, or a sworn member of the police or a class of employee prescribed in regulations made under section 230A of the KiwiSaver Act.
"Hybrid scheme contributions" cover those contributions an employer makes (or credits) to a scheme where the retirement benefits are calculated by adding to an employee's total contributions a percentage of those contributions. Such schemes are not included in the "defined benefit scheme member" exclusion or in "other contribution". The amount of the contribution is given by the following formula:
Employer contributions that are paid from reserves will be treated as employer contributions for the purposes of "other contributions". Also, the amount of the employer contribution will be the amount payable before the deduction of employer's superannuation contribution tax (specified superannuation withholding tax).9
This only applies when the conditions in paragraph (b) "other contributions" above are met.
Joe is a member of his employer's existing superannuation scheme and joins KiwiSaver. Joe, the scheme and his employer meet the rules of" other contributions "in section 101D of the KiwiSaver Act. Joe's employer makes a matching 2 percent employer contribution to the existing scheme every pay period. His employer will not be required to make compulsory employer contributions in the 2008-09 tax year or 2009-10 tax year as the amount of" other contribution" equals or is greater than the amount of the compulsory employer contribution payable. However, from 1 April 2010 Joe's employer will be required to make a 1 percent compulsory employer contribution to his KiwiSaver scheme and a 2 percent contribution from 1 April 2011 as the contributions to the existing scheme are less than the compulsory amount.
Section 101E allows an employee and employer to agree the allocation of compulsory employer contributions10 between an employee's KiwiSaver Scheme and CSF. If no agreement is reached, the compulsory employer contributions are first allocated to the employee's KiwiSaver scheme and then to the CSF (if any).
Application of section 101B
Section 101B(1) provides that compulsory contributions 10 are to be paid in addition to an employee's gross salary or wages used in section 101D(3) (on top of remuneration). Subsections (2) and (3) provide that a contractual arrangement of parties to an employment relationship cannot override the intention of subsection (1). That is, if the contractual arrangements specify that the employee must pay the cost of compulsory employer contributions from the employee's existing salary or wages, the arrangement has no effect.
However, from 13 December 2007, parties to an employment relationship are free to agree contractual terms and conditions that ignore the "on top of" remuneration requirement and the provisions of this section do not apply. Subsection (4) inserts an" avoidance of doubt" provision so that the duty of good faith as described in the Employment Relations Act 2000 always applies when parties to an employment relationship bargain for terms and conditions relating to compulsory contributions and associated matters, such as the employer tax credit.
Enforcement of the payment of compulsory employer contributions to a KiwiSaver scheme
Sections 93 and 101F(1) require employer contributions to a KiwiSaver scheme to be paid to Inland Revenue at the same time as employee contributions via the PAYE system. Other amounts that do not count as contributions under section 68(2) of the KiwiSaver Act (such as group life insurance) must be paid direct to the provider.
The payment of compulsory employer contributions via Inland Revenue provides a mechanism to allow Inland Revenue to police the payment by employers. Non-payment of compulsory employer contributions will be subject to current collection and enforcement practices. Section 216 of the KiwiSaver Act has been amended to provide a specific penalty for employers that do not comply with the requirement to pay compulsory employer contributions. From 1 April 2009, 11 section 216 will be repealed and employers will be subject to the penalties that apply for the non-compliance of other PAYE-type tax obligations. Furthermore, the definition of "tax" in section 3 of the Tax Administration Act 1994 has been amended from 1 April 2008 to include compulsory employer contributions. This will allow the Commissioner to use existing collection powers.
Enforcement of the payment of compulsory employer contributions to CSFs
Section 101F(2) requires compulsory employer contributions to a CSF to be paid directly to the provider. The payment must be made no later than one month after the payment of the salary or wages to which the contribution relates.
In keeping with current practice, it will be the responsibility of the provider to ensure compulsory employer contributions from an employer are made. It is expected that the current practice of employers certifying that all employer contributions have been made will continue. New section 101H requires a provider to give notice to an employer requesting payment if the provider is aware that the employer has failed to pay compulsory employer contributions. A copy of that notice must be provided to the Financial Markets Authority. If payment does not occur within one month of the notice being given and the amount of the unpaid contributions is more than $500, the provider must give notice to the Financial Markets Authority of the default.
New section 101I specifies that once notification has been received, the Financial Markets Authority must determine the amount of any short payment. The Financial Markets Authority can use existing powers under the KiwiSaver Act to investigate the matter and determine the amount outstanding. Once the Financial Markets Authority has determined the amount of any short payment, the employer will be notified of the amount and will have 28days to pay or dispute the amount. If the amount remains unpaid and no objection has been received, the amount will be referred to Inland Revenue for collection. The amount will be due and payable to Inland Revenue 20 working days after the notice is received.
The definition of "tax" in section 3 of the Tax Administration Act 1994 has been amended to include compulsory employer contributions to a CSF. This will allow the Commissioner to impose penalties and use existing collection powers from 1 April 2009 when these debts are referred to the Commissioner for collection.
Rules for providers
Section 101G requires the provider to allocate the compulsory employer contributions across the investment products that the member has subscribed to or been allocated. The contributions are to vest immediately.
In addition, section 101G(3) requires the provider to notify Inland Revenue of the date that a member will be entitled to withdraw his or her accumulated interest in the scheme. This must be done within two months of the person becoming entitled to withdraw the accumulated interest. Inland Revenue must notify the member's employer of that date so that the employer can cease making compulsory employer contributions.
Withdrawal of compulsory employer contributions
The KiwiSaver Act allows a member to withdraw employer contributions that have vested in an employee in the following circumstances:
- to assist with the purchase of the member's first home (which includes second-chance buyers); 12
- for significant financial hardship;
- for serious illness;
- on permanent emigration from New Zealand;
- on the death of the member;
- as required by any statute such as an order made under section 31 of the Property (Relationships) Act 1976; and
- upon the age of eligibility for New Zealand superannuation or five years of membership, whichever occurs later.
As section 101G(2) provides that compulsory employer contributions will vest immediately with the member, these contributions can also be withdrawn in the foregoing circumstances. However, the KiwiSaver Act does not allow employer contributions to be diverted under a mortgage diversion facility.
Shareholder-employees of a close company
Employers of shareholder-employees of a close company will be required to make compulsory employer contributions for employees if their remuneration from the company is subject to PAYE and they are having KiwiSaver contributions deducted from that remuneration. Salary or wages for the purposes of the KiwiSaver Act excludes salary or wages or other income to which section OB 2(2) (meaning of source deduction payment: shareholder-employees of close companies) applies. As a result, only salary or wages subject to PAYE are subject to a compulsory employer contribution.
Private domestic workers
The KiwiSaver Act has been amended to clarify how KiwiSaver applies to private domestic workers, who are required to pay their own PAYE. As a result, private domestic workers can be both an employee and employer under the KiwiSaver Act, and the Act has been clarified to reflect this. Private domestic workers can deduct KiwiSaver contributions from their salary or wages and can choose to be an employer for the purposes of compulsory employer contributions. If they pay compulsory employer contributions, they will be entitled to the employer tax credit.
4 An employer contribution is an employer superannuation contribution (specified superannuation contribution) made by an employer to a KiwiSaver scheme or a complying superannuation fund and includes compulsory contributions. It does not include amounts, such as group life insurance, that do not count as a contribution under section 68(2) of the KiwiSaver Act. See the definition of "employer contribution" in section 4 of the KiwiSaver Act. (Note that for the purposes of the Income Tax Act 2007, the term "employer's superannuation contribution" replaces the term "specified superannuation contribution".)
6 To determine the amount of the contribution that vests within the five-year period when a contribution is paid, the employer is required to calculate, on the basis of the vesting scale in the trust deed, the amount that will vest if the employee is still a member after five years. This does not exclude schemes where the vesting scale is more than five years - contributions are counted to the extent that they vest within the requisite 5-year period.
8 Vesting percentage is the percentage of the employee's total contributions that is added to those contributions five years after the employee first became a member of the scheme, grossed up for specified superannuation contribution withholding tax (SSCWT). SSCWT is a tax on any monetary contribution to a superannuation fund that is paid by an employer for an employee's benefit. Employer contributions to KiwiSaver schemes and complying superannuation funds are exempt from SSCWT up to a cap of whichever is less - your contribution or 4 percent of your salary and wages. However, any contributions over the cap are subject to SSCWT.
11 Officials have identified a drafting error relating to a double-up in the application date of the amendments to section 216. The correct application date for the repeal of this section is 1 April 2009. This error will be remedied in the next available tax bill.
12 A second-chance buyer is a previous home owner who is in the same financial situation as first-home buyers in terms of income and assets. Second-chance home buyers must apply to Housing New Zealand for a determination of whether they are in the same financial situation as a first-home buyer