Employer tax credit (sections KJ6 to KJ10 of the Income Tax Act 2004 and sections MK 1(2) and (4) and MK 9 to MK 16 of the Income Tax Act 2007)
2007 legislation provides a tax credit to employers to help offset the costs of making compulsory employer contributions to an employee's KiwiSaver scheme.
New section MK 1(2) of the Income Tax Act 2007 (section KJ 6 of the Income Tax Act 2004) provides a tax credit to employers to help offset the costs of making matching compulsory employer contributions to an employee's KiwiSaver scheme or CSF. The tax credit will be equal to the lesser of the employer's contribution or $20 a week for each employee. Sections MK 9 to MK16 of the 2007 Act (sections KJ 7 to KJ 12 of the 2004 Act) set out the eligibility rules and how the credit is to be applied. To minimise the compliance costs and cash-flow implications of compulsory employer contributions, the payment of the tax credit is integrated into the PAYE remittance process. It is expected that employers will pay Inland Revenue a net amount after deducting the tax credit from their PAYE liability for the payment period.
This tax credit can be claimed by any employer (including tax-exempt entities such as charities) provided the employer is making an employer contribution to a KiwiSaver scheme or a CSF for an employee who meets the requirements in section MK 9 of the Income Tax Act 2007.
The employer tax credit applies to employer contributions made to a KiwiSaver scheme or CSF from 1 April 2008.
The following section references are to the 2007 Act unless otherwise specified.
New section MK 1(2) allows an employer who makes a contribution on behalf of an employee a tax credit for the payment period equal to the amount calculated under section MK 10. To be eligible for the credit the employer must meet the requirements in section MK 9.
To be eligible for the employer tax credit, the employer must:
- pay an employer contribution for an employee who is aged 18 or over and is not entitled to withdraw an amount from a KiwiSaver scheme or CSF under the scheme rules that require lock-in (that is, the age eligibility for New Zealand superannuation or five years of membership, whichever occurs later);
- provide details of the amount of the credit in an employer monthly schedule or remittance certificate (although that is not required if subsection (2) applies); and
- be an employer to which KiwiSaver applies (that is, be an employer who is tax-resident in New Zealand or, if not tax-resident, be an employer who carries on a business from a fixed establishment in New Zealand or chooses to apply the KiwiSaver Act on behalf of its employees).
Subsection (2) applies when the employer has unpaid compulsory employer contributions.
Amount of credit
The amount of the tax credit allowable to an employer is equal to the lesser of:
- the amount of the employer contributions for the employee for the payment period; and
- the amount calculated using the formula: $20 x weeks in payment period.
"Weeks in payment period" means the number of weeks for the payment of the employee's salary or wages for which the employee meets the eligibility requirements in paragraph (a) above, including weeks in that period in which no employer contribution is made. Parts of a week are expressed as a decimal. A "payment period" means the period in which PAYE is withheld in relation to an employee, and includes a period of a month or a period of the 1st to the 15th of a month and a period from the 16th to the end of a month.
For example, if during a payment period for the month of April an employer makes employer contributions of $50, the amount of the tax credit will be $50 because the actual employer contributions are less than the amount calculated by the formula($85.71). If the actual employer contributions were more than $85.71, the amount of the tax credit for that month would be limited to $85.71.13
The tax credit is available for both voluntary and compulsory employer contributions to a KiwiSaver scheme or CSF.
Application of tax credit
New sections MK 11 to MK 13 set out the rules relating to how the tax credit will be applied. The tax credit is integrated into the PAYE remittance process so that the value of the credit is given to employers at the same time the employer is required to remit the contributions to providers or Inland Revenue.
Section MK 11 provides that the tax credit arises when the PAYE is due for the month or the date of payment of PAYE for a private domestic worker in which the employer contributions were made. For example, tax credits for contributions made during April 2008 for a monthly payment period would arise on 20 May 2008, being the payment date for that period.
Subsection (2) deals with the situation when subsection MK 9(2) applies, which covers short payment of compulsory employer contributions to a CSF or KiwiSaver scheme.
Sections MK 12 and MK 13 deal with the use of the tax credits to offset employer contributions and other PAYE liabilities.
The tax credit calculated for a payment period is used as follows:
- first, to pay KiwiSaver compulsory employer contributions due for that period or the amount owing to a CSF referred to in a notice received by the Commissioner under section 101I(5) of the KiwiSaver Act;
- second, to pay voluntary KiwiSaver employer contributions for that payment period;
- third, to pay any other amounts payable for that payment period by the employer;
- fourth, to pay any other amount payable by the employer to the Commissioner (arrears of an amount due under an Inland Revenue Act); and
- fifth, to be refunded to the employer.
From 1 April 2009, new section 101I of the KiwiSaver Act requires the Financial Markets Authority to send a notice to Inland Revenue detailing the amount of compulsory employer contributions to a CSF that is owed by an employer. When the notice is received by Inland Revenue or there is a short payment of compulsory employer contributions to a KiwiSaver scheme, new section MK 13 allows the employer tax credits used under sections MK 12(1)(b) or (c) to be used to meet that amount owing. When this occurs, a tax liability of the amount of the credits used becomes payable by the employer to the Commissioner. This is to ensure that the employee receives a contribution equal to the amount of the employer tax credits claimed.
New section MK 14 provides that if employer contributions are refunded as a result of an employee opting out of KiwiSaver, the amount of any tax credits claimed for the contributions is refundable to the Commissioner.
New section MK 15 provides that if someone is employed by a number of employers who are associated for tax purposes, the associated employers will be considered as one employer for the purposes of claiming the tax credit. This is to prevent associated employers claiming more than one credit for the same employee.
Private domestic workers who are employers for the purposes of the KiwiSaver Act are treated as paying salary or wages to themselves in the capacity of an employee for the purposes of the employer tax credit rules. This means that they are able to claim the credit if employer contributions are made.
Section DC 7 of the Income Tax Act 2007 (Contributions to employees' superannuation schemes), which allows an employer a deduction for contributions to an employee's superannuation scheme, has been amended to limit the amount of the deduction for contributions to a KiwiSaver scheme or CSF to the amount for which no credit was claimed.
Section CX 50 of the Income Tax Act 2007 ensures that the employer tax credit is treated as excluded income. For GST purposes, the employer tax credit will be treated as a non-taxable grant or subsidy.
Definition of "salary and wages" (section 4 of the KiwiSaver Act)
The definition of "salary and wages" in section 4 of the KiwiSaver Act has been amended in the following ways:
- From 1 July 2007, all weekly compensation and paid parental leave payable under Part 7A of the Parental Leave and Employment Protection Act 1987 are treated as salary or wages for the purposes of KiwiSaver.
- Redundancy payments as defined in the Income Tax Act 2004 are excluded from the definition of "salary and wages".
- Expenditure on account of an employee and allowances if they are overseas, accommodation and other costs of living are also excluded from the definition of "salary and wages".
The government's intention was that from 1 April 2008, the value of benefits such as board or lodging or the use of a house or quarters, or the payment of allowances instead of such benefits14 would be excluded from the definition of "salary and wages" in section 4 of the KiwiSaver Act. However, this provision was inadvertently omitted from the amending Act. The omission is expected to be corrected in future legislation.
For the purposes of compulsory employer contributions, the following are not considered salary or wages:
- all weekly compensation and paid parental leave; and
- weekly compensation paid by an employer, unless the employer chooses to treat such payments as salary or wages.
This means that these payments are not subject to compulsory employer contributions.
For contributions to complying funds, bonuses, commissions and other amounts that are not included in gross base salary or wages are excluded. This enables employers that contribute to complying funds to apply current practice (gross base salary, or a variant of this) as a contributions multiplier. This change means non-regular payments are excluded and contributions, including compulsory employer contributions, are calculated on the same gross base salary basis as an employee's contribution. However, employers will have to use gross salary and wages as a basis for contributions for those employees that choose to opt into KiwiSaver.
13 The formula provided in the Taxation (KiwiSaver) Act 2007 for the calculation of the employer tax credit currently results in a shortfall of the tax credit, depending on how many weeks pay an employee has received in a PAYE period. Officials are working on remedying this legislative error to ensure that the policy intent is implemented.