The new KiwiSaver legislation detailed analysis
Detailed analysis of the 2007 KiwiSaver legislation covering member tax credits, creditable membership, and the transitional rules covering contributions paid to IR.
Member tax credit (sections KJ to KJ 5 of the Income Tax Act 2004 and sections MK1(1) and (3) and MK 2 to MK8 of the Income Tax Act 2007)
A number of changes have been made to the member tax credit rules as enacted by the Taxation (KiwiSaver and Company Tax Rate Amendments) Act 2007. Section references are to the Income Tax Act 2004 unless otherwise specified.
The requirements that a person must meet to be eligible for the member tax credit are set out in section KJ 2. New section KJ 2(a) introduces the requirement of having a "creditable membership" of KiwiSaver or a complying fund. Accordingly, a new definition of "creditable membership" has been included in section OB 1. The definition provides that when a person joins KiwiSaver or a complying fund, the period of eligibility for the member tax credit begins from the earlier of:
- the first of the month in which contributions are deducted from an employee's salary or wages; or
- the first of the month in which a contribution is received by Inland Revenue (a voluntary contribution paid directly to Inland Revenue); or
- the first of the month in which securities are allotted by a KiwiSaver scheme or a CSF.
A transitional rule applied as a result of the legislative requirement that all contributions must be paid to Inland Revenue during the period 1 July to 30 September 2007. This transitional rule treated membership as beginning on the first of the month in which a provider received a valid application for membership from a person if contributions had been received by either Inland Revenue or the provider during the period 1 July to 31 October 2007.
Amount of member tax credit
The amount of the member tax credit payable is calculated under the formula in section KJ 3. It has been amended to correct a drafting error and to clarify the calculation of the credit. If a person meets the requirement set out in section KJ 2 for the full member credit year (1 July to 30 June), the amount of the credit is the total amount of contributions received during the year up to a maximum of $1,042.86. If the person does not meet the requirements in section KJ 2, the credit is apportioned on the basis of the number of days the person meets the requirements. Two possible formulas for calculating the credit are provided, with the relevant formula depending on whether the amount contributed by the member is more or less than $1,042.86 divided by365 ($2.857 per day).
|member credit contributions 2 |
|included days 3|
|$1,042.86 x included days |
If the amount calculated by the first formula is less than $1,042.86 divided by 365 ($2.857 per day), the amount of the member tax credit is equal to the total amount of that person's contributions for the member credit year
(1 July to 30 June). If the amount calculated under the first formula is equal to or greater than $1,042.86 divided by 365 ($2.857 per day), the amount is calculated by the second formula.
Tracey is automatically enrolled in KiwiSaver on 15 April 2008 through her employer. Her eligibility for the member tax credit begins on 1 April (deductions made from salary or wages in April), 91 days before the end of the member credit year (30 June 2008). Tracey makes contributions to her KiwiSaver scheme during this 91-day period totalling $500 (approximately $38 a week). As the amount that she has contributed is greater than $1,042.86 divided by365 ($2.857), the amount of her member tax credit is calculated using the formula:
|$1,042.86 x 91 (included days) |
Tracey's tax credit entitlement for the 2007-08 member credit year is $260 (13 weeks at $20).
Mike opts into KiwiSaver through his employer on 26April 2008. The first contributions from his pay will not be deducted until May, so he makes a voluntary contribution to Inland Revenue that is received on 28April 2008. Mike's eligibility for the member tax credit begins on 1 April 2008, 91 days before the end of the member credit year (30 June 2008). Mike makes contributions to his KiwiSaver scheme during this 91-day period totalling $200 (approximately $15.38 a week). As the amount he has contributed is less than $1,042.86 divided by 365 ($2.857), the amount of his member tax credit for the 2007-2008 member credit year is equal to the total amount of his member credit contributions for the member credit year - $200 (approximately $15.38 x 13 weeks).
Member credit contributions
A new definition of "member credit contributions" has been introduced and includes amounts received and held by the Commissioner. These are contributions received and held by Inland Revenue but not on-paid to the provider until after the member credit year. These will count as contributions for calculating the member tax credit for that year. Employer contributions, amounts diverted under a mortgage diversion and amounts refunded are excluded for the purposes of calculating the credit.
Processing claim for credit
Section KJ 4(2) has been amended to provide that upon receipt of a claim, Inland Revenue has 30 working days to process and pay the claim to the provider. Member tax credits are paid to providers on a first-come basis. There is no longer a pro-rating of the payment between providers if the member has more than one provider.
Payment of credit
New subsection KJ 4(3) provides the circumstances in which the Commissioner may make a payment to individual members or to another provider. A final payment may be made to the member or the member's estate for reasons of serious illness, death or when the member's account is closed. Inland Revenue will pay the credit to the member's provider at the time the claim is made. If there is, or will be, a change in provider (a request for transfer), the credit will be paid to the new provider if requested by the first provider.
Allocating the credit
Section KJ 5 (3) has been amended to clarify the rules in relation to allocating the member tax credit. The provider must allocate the member tax credit according to the current investment allocation instructions the member has elected or the investment allocation to which the member has been assigned.
Claiming the credit
The provider must claim the tax credit in the "form prescribed by the Commissioner". Providers will make a claim after 30 June each member credit year on the basis of the contribution information they hold (and Inland Revenue does not hold) at that date. That will include information such as the amount of contributions received directly by the provider and the amount of contributions subject to a mortgage diversion. Inland Revenue will calculate and pay the credit based on the information received and the contribution information it holds. All contributions for complying funds will, however, need to be received by 30 June to count towards the calculation of the credit in that year as all complying fund contributions are made directly from the employer to the provider. (Inland Revenue does not hold contribution information for complying funds.)
The member tax credit process will require providers to furnish necessary information to Inland Revenue to enable it to calculate the member tax credit. Inland Revenue will calculate the member tax credit on the basis of this information and make supplementary member tax credit payments, where appropriate, when additional information is available in relation to money in the holding account.
Providers retain the ability to make supplementary claims for periods for which they have obtained the information needed to make a claim - either when no claim was previously lodged, or when less than the maximum eligible claim has previously been paid. However, because Inland Revenue will be calculating the entitlement to the member tax credit based on information provided to it and also on the qualifying contributions it holds, KiwiSaver providers may not need to make supplementary claims after the end of the member credit year.
As CSF providers may not always hold the relevant IRD numbers for their members, an amendment enables CSFs that do not have a member's IRD number to supply other information to Inland Revenue to assist it in making the payment. If it is unable to make the payment on the basis of the information provided, Inland Revenue will inform the provider so that the provider can write to the member requesting the necessary information. Section 68C (3)(a) of the Tax Administration Act 1994 has been amended to clarify that the IRD number need be provided only if known.
Transfers - information to be provided
Section 56 of the KiwiSaver Act has been amended so that KiwiSaver providers are no longer required to provide information about the amount of the member tax credit received or information about previous claims made by them to a new KiwiSaver provider on transfer. This is because Inland Revenue will hold this information. However, the following details will still need to be provided to another scheme on transfer:
- the value of qualifying contributions received directly;
- mortgage diversion arrangements
- any periods of ineligibility because of residence outside New Zealand; and
- the date on which a person first became a member of a KiwiSaver scheme.
Clause 14(2) of Schedule 1 of the KiwiSaver Act has been amended to provide that when KiwiSaver members permanently emigrate and transfer all of their funds in their KiwiSaver scheme to a foreign superannuation scheme the nominal value of the credit up to the value of their accumulation in the scheme will be repaid to the Crown.