Repeal of fund withdrawal tax
2010 legislation repeals fund withdrawal tax - payable on superannuation fund withdrawals relating to employer contributions for employees on highest tax rate.
As a consequence of the alignment of the top ESCT rate and the top personal tax rate at 33% in Budget 2010, fund withdrawal tax (FWT) was to be phased out so that it would not apply to contributions made after 1 October 2010.
However, FWT has instead been repealed for all withdrawals from 1 April 2011, which is the date from which there is no discrepancy between the top ESCT rate and the top actual tax rate.
FWT is a tax of between 4.2% and 5% payable on certain superannuation fund withdrawals that relate to employer contributions for members whose income is above $70,000. FWT was introduced to ensure that employees who are on the highest tax rate (38% until 1 October 2010) are not under-taxed under the employer superannuation contribution tax (ESCT) rules, as the top rate for ESCT was 33%.
Without FWT it would have been possible for a person on the 38% tax rate to "salary sacrifice" by agreeing with their employer to pay a contribution to a superannuation fund instead of salary. This contribution would have been taxed at a final rate of 33%. If the person later withdrew the employer contribution from the fund there would have been no further tax on the withdrawal. As not all superannuation funds require that members' funds are "locked" in the fund until retirement, this would have provided a mechanism for people on 38% to have salary and wages taxed at 33% rather than 38%.
The Taxation (Budget Measures) Act 2010 reduced the top marginal PAYE rate of 38% to 33% from 1 October 2010. This means that from 1 October 2010 there will be no discrepancy between the top ESCT rate and the top marginal PAYE rate (which is the final rate that applies for non-filing individuals). From 1 April 2011, there will be no discrepancy between the top ESCT rate and the top personal tax rate (which is the final rate that applies for individuals who file returns). As a result, there will no longer be a need for FWT.
Rather than repealing FWT outright, the Taxation (Budget Measures) Act 2010 had preserved FWT for contributions made before 1 October 2010 and then phased it out after five years. The rationale was that repealing FWT carries a theoretical risk of salary sacrifice in the period after the Budget but before marginal tax rates are aligned with ESCT.
Subpart CS has been repealed from 1 April 2011. This means that FWT will not apply to withdrawals after this date.
If a withdrawal is made before 1 April 2011, funds will need to return income that relates to the 2010-11 or earlier income year according to section CS 1(8), notwithstanding that subpart CS is repealed from 1 April 2011. For example, if a withdrawal to which section CS 1 applies is made on 1 August 2010 (during the fund's 2010-11 income year), the fund will need to include an amount calculated under section CS 1 in their income for the 2011-12 income year.
A number of consequential repeals have been made in the Income Tax Act 2007 and the Tax Administration Act 1994 to reflect the repeal of FWT.
- Section CX 10(2)(c) of the Income Tax Act 2007, which provided that a loan made by a superannuation fund is not a fringe benefit if it falls under the FWT rules.
- Section HM 37(3) of the Income Tax Act 2007, which provided that income derived under FWT rules by a multi-rate PIE is treated as income to which no investor has an investor interest.
- Section RD 72 of the Income Tax Act 2007, which provided that a trustee may recover FWT from member's distribution.
- Section YA 1 of the Income Tax Act 2007, which defined:
- "member" (paragraph (b))
- "significant financial hardship"
- "trust rules" (paragraph (a))
- Section 32B of the Tax Administration Act 1994, which provided that a superannuation fund can request information from a member or member's employer in respect of FWT.
- Section 32C of the Tax Administration Act 1994, which provided that a superannuation fund can request information from a transferor super fund in respect of FWT.
- Section 165AA of the Tax Administration Act 1994, which provided that a superannuation fund may recover FWT from a member's distribution.
Under section 4 of the Taxation (Budget Measures) Act 2010, funds would have been required to track contributions made before and after 1 October 2010 until FWT was eventually phased out after five years. This provision has been repealed from 7 September 2010.
Amendments to repeal FWT apply from 1 April 2011.
Section 4 of the Taxation (Budget Measures) Act 2010 has been repealed from 7 September 2010, which is the date that the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 received Royal assent.