Retirement scheme contribution tax
2007 legislative amendment enacts a new tax structure for taxing certain contributions to a retirement savings scheme.
Sections BE 1, CX 42B, KD 1(1), LB 3, LD 4, LD 12, NEB 1 to 7, NF 1(2), NG 16B and OB 1 of the Income Tax Act 2004; sections BE 1(5B), CX 50B, LB 6, LE 7B, LO 2B, MB 1(5B), MB 6, RA 1, RA 6B, RA 10, RA 15, RA 24, RD 1, RE 2, RF 16, RH 1 to 6, YA 1, and Schedule 1, Part D, clause 7 of the Income Tax Act 2007, and sections 28C, 29 (1), 31(1), 47B and 48B of the Tax Administration Act 1994
The Taxation (Business Taxation and Remedial Matters) Act 2007 amends the Income Tax Act 2004, the Income Tax Act 2007 and the Tax Administration Act 1994 to enact a new tax structure for taxing certain contributions to a retirement savings scheme. The new rules allow retirement scheme contributions that would be taxable in the hands of the person who benefits from the contribution to be subject to a final withholding tax instead. The effect of these rules is that this income is treated as excluded income and therefore not taken into account for student loan, child support and Working for Families tax credit purposes. The withholding tax imposed on the contribution is based, generally, on the contributor's tax rate in either of two previous income years before the contribution is made.
Te Runanga o Ngai Tahu (TRoNT) asked the government to consider new rules for taxing contributions to a retirement saving scheme. TRoNT was setting up a retirement savings scheme for its members, and was planning to make contributions to the scheme on behalf of its members. Members' funds, including contributions made by TRoNT, would be locked-in until retirement. However, early withdrawals would be permitted in certain circumstances, such as to assist with the purchase of a first home.
Under current law, any contribution that TRoNT made to the scheme on behalf of members would be taxable in the hands of the member and subject to income tax, with that income being taken into account for social assistance purposes. TRoNT proposed that these contributions should be subject to a final withholding tax rather than income tax so members would not have to include this income in their tax returns, given this income was locked into a retirement saving scheme. TRoNT also proposed that the contributions should not be taken into account for social assistance purposes, because contributions would be locked in and unavailable for day-to-day living expenses. This treatment is consistent with the treatment of employer superannuation contributions, fringe benefits and portfolio investment entity (PIE) income.
Although the impetus for developing these rules came from TRoNT, the rules apply to companies (but not close companies), widely held unit trusts and Maori authorities.
Income tax amendments
New subpart RH of the 2007 Act and subpart NEB of the 2004 Act enact the Retirement Scheme Contribution Tax rules (RSCT rules). The RSCT rules are an elective regime that allows a retirement scheme contribution such as a taxable Maori authority distribution or a dividend made by a retirement scheme contributor to a retirement savings scheme to be subject to retirement scheme contribution tax. Section BE 1 of both Acts has been amended to treat RSCT as a withholding liability. If the retirement scheme contributor does not apply the RSCT rules, the contribution will be subject to existing tax rules and taxable in the hands of the member or shareholder of the retirement scheme contributor.
A retirement scheme contribution is defined in section RH 2 of the 2007 Act (section OB 1 of the 2004 Act) as a contribution in money made by a retirement scheme contributor to a retirement savings scheme for the benefit of a person who is a member of, or has an ownership interest in, the contributor. For example, a taxable Maori authority distribution made by a Maori authority to a retirement savings scheme on behalf of its members would be subject to the RSCT rules if the contributor applied the RSCT rules. The amount of the contribution includes any imputation credit or Maori authority credit attached to the distribution.
For an entity to be a retirement scheme contributor for a person in an income year, section RH 4 of the 2007 Act (section NEB 6 of the 2004 Act) provides that the entity must be:
- a widely held unit trust;
- a company other than a close company; or
- a Maori authority.
The person must be a unit holder, shareholder or member of the entity during or before the year that the entity makes a retirement scheme contribution. (For the purposes of this TIB item, the term "member" is used when referring to this person.) This is the person who benefits from the contribution.
New section RH 3 of the 2007 Act (section NEB 5 of the 2004 Act) specifies that for an entity to be a retirement savings scheme for the purposes of the RSCT rules, the entity must be:
- a portfolio investment entity;
- hold the funds from a retirement scheme contribution for the member; and
- the distribution rules governing the distributions of funds by the scheme are approved by the Commissioner as fair and reasonable and meet the rules relating to distributions which are set out in section RH 3 of the 2007 Act (section NEB 5 of the 2004 Act). In general, the funds cannot be distributed before the person reaches the age of retirement as set out in the rules. However, early withdrawals are permitted in certain circumstances, such as to assist with the purchase of the first home, assist with tertiary study or repay a student loan, and withdrawals allowed for by the KiwiSaver rules (for example, significant financial hardship).
The retirement scheme contributor is required to withhold the tax from the contribution at the time the payment is made at the RSCT rate for the member (the retirement scheme prescribed rate). RSCT is payable by the 20th of the month following the month in which the contribution was made and deducted. The retirement savings scheme, if appointed by the retirement scheme contributor, can act as the contributor's agent in relation to the calculation and payment of the tax.
The RSCT rate is set out in Schedule 1, Part D, clause 7 of the 2007 Tax Act and in the definition of "retirement scheme prescribed rate" in the 2007 and 2004 Acts. Table1 sets out the amount of tax payable.
|Criteria for determining rate||Retirement scheme prescribed rate|
|If none of the following situations apply.||39%|
|If none of the following situations apply and the member has, in either of the two income years preceding the year in which the contribution is made, taxable income of $60,000 or less and has provided his or her tax file number.||33%|
|If the situation below does not apply, and ||19.5%|
|If the member is a non-resident at the time of the contribution and the contribution is a non-resident's withholding income.||0% (in this case the contribution is subject to non-resident withholding tax)|
Sections LE 7B and LO 2B of the 2007 Act (sections LB 3 and LD 4 of the 2004 Act) allow imputation credits and Maori authority credits to be used to meet the RSCT liability of the retirement scheme contributor. If the amount of the credit exceeds the RSCT liability, the amount of that excess credit can be claimed by the member as if it were a credit attached to a distribution made to the member. The retirement scheme contributor must give notice, within 30 days of the contribution, of the amount of the excess.
Section CX 42B of the 2004 Act and section CX 50 of the 2007 Act treats retirement scheme contributions that are subject to the RSCT rules as excluded income. This provision applies to the member (that is the person for whose benefit the contribution is made) and the retirement savings scheme. However, a retirement scheme contribution is not treated as excluded income in the following situations:
- if the member provides the retirement scheme contributor or the retirement savings scheme with a tax rate that is less than the member's rate;
- the member includes the retirement scheme contribution in a return of income for the year in which the contribution is made; or
- the member is a non-resident and the contribution is non-resident passive income (non-resident withholding income).
If the retirement scheme contribution is not treated as excluded income, section LB 6 of the 2007 Act (section LD 12 of the 2004 Act) allows a credit for the amount of the RSCT withheld. In the case of the non-resident, the amount of the credit is the excess amount of the RSCT withheld over the non-resident withholding tax paid in relation to the contribution.
Section RE 2 of the 2007 Act (section NF 1 of the 2004 Act) which deals with resident passive income (resident withholding income) has been amended to provide that:
- a taxable Maori authority distribution that is subject to the RSCT is not treated as resident passive income; and
- a dividend that is treated as excluded income by virtue of being subject to RSCT is not resident passive income.
New section RF 16 of the 2007 Act (section NG 16B of the 2004 Act) provides that when RSCT is paid in respect of a member who is non-resident and the contribution is subject to the non-resident withholding tax rules, the contributor is treated as having withheld an amount of non-resident withholding tax equal to the lesser of the amount of the RSCT paid or the non-resident withholding tax payable. If excess RSCT is paid, section LB 6 of the 2007 Act (section LD 12 of the 2004 Act) allows a credit for the excess.
Consequential amendments have been made to subpart RA of the 2007 Act to incorporate the RSCT rules into the general withholding and payment obligations.
The Working for Families tax credits rules in section MB 1 of the 2007 Act (section KD 1 of the 2004 Act) have been amended to ensure that retirement scheme contributions that are not treated as excluded income are not included in the assessable income for the purposes of the tax credit rules. In addition, a new section MB 6 of the 2007 Act (section KD 1(1)(hh) of the 2004 Act) allows, in limited circumstances, a distribution of a retirement scheme contribution from a retirement savings scheme to be included in a person's assessable income for calculating the person's entitlement to these tax credits.
Sections RA 2 and RA 24 of the 2007 Act (section NEB7 of the 2004 Act) and the definition of the RSCT rules provide that:
- the provisions of the 2007 Act, 2004 Act and the Tax Administration Act 1994 apply to a person who is liable for RSCT as if RSCT were income tax imposed under section BB 1;
- sections 170(2), 171 and 172 of the Tax Administration Act (recovery of unpaid resident withholding tax) apply; and
- Part 9 of the Tax Administration Act (penalties) applies.
Tax administration amendments
The RSCT rules have amended a number of provisions in the Tax Administration 1994. In particular:
- section 22 (keeping of records) has been amended to require a retirement scheme contributor to keep records of every contribution and the value of those contributions, including the details of the recipient of the contribution;
- section 29 (shareholder dividend statement to be provided by company) has been amended to require RSCT information to be shown on the dividend statement as appropriate; and
- section 33 (Maori authority to give notice of amounts distributed) has been amended to require RSCT information to be shown on notices as appropriate.
New section 28C requires that a person who gives notice that their tax rate is less than 39% for the purposes of calculating the RSCT on contributions, must provide their tax file number in the notice.
New section 47B requires a retirement scheme contributor or a retirement savings scheme to provide a statement to the Commissioner showing the amount of the RSCT and any other information required. The statement must be provided no later than the 20th of the month after the month in which the RSCT was withheld. A statement is only required if the RSCT to be withheld is not satisfied by imputation credits or Maori authority credits attached to the retirement scheme contribution.
Section 48B requires a reconciliation statement to be filed each year if a retirement scheme contributor makes a contribution. The reconciliation statement must be received by Inland Revenue by the end of the second month after the end of the income year.
The amendments to give effect to the RSCT rules in the 2004 Act and the Tax Administration Act 1994 come into force on 1 April 2007. The amendments in the 2007 Act come into force on 1 April 2008, except for section 554(3) (which inserts the basic rates of RSCT into Schedule 1, Part D), which comes into force on 1 July 2008. The delay in this section coming into force is a drafting error as it was never intended this provision be delayed. Inland Revenue considers that section ZA 3(1) of the Income Tax Act 2007 applies to allow the provisions in the 2007 Act to be interpreted as a reference to the Income Tax Act 2004 to the extent necessary to reflect sensibly the intent of the legislation. It is not the intent of the legislation that no withholding rates apply during the period 1 April 2008 to 30 June 2008. This is on the basis that the references in sections RH 5 and RH 6 to Schedule 1, Part D, clause 7 of the 2007 Act are references to the corresponding provision in the 2004 Act, which is the definition of "retirement scheme withholding rate". This ensures that the withholding rates apply to any contributions made during the period 1 April 2008 to 30 June 2008.