Two pieces of legislation now before the House carry significant implications for superannuation and KiwiSaver schemes.
This Brief Counsel examines the provisions in the Taxation (Budget Measures) Bill, due to become law later this week, and in the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill which was reported back to Parliament last week.
The budget changes
Investment income tax
Effective 1 October 2010, PIE investors’ notified investor rates (the member-specific tax rates applying to taxable investment income in multi-rate PIEs) will be amended as follows:
For the 2010/11 income year, the new rates will apply to every day on or after 1 October 2010 and the old rates will apply for the period 1 April to 30 September 2010.
The taxable income and net PIE income thresholds for the differing rates will not change - only the rates themselves. This means that a person who is invested in a multi-rate PIE on 30 September 2010 will automatically shift to the appropriate new rate on 1 October 2010, without having to re-elect a rate (and that the reduction from 30% to 28% for non-residents, and for members who have not provided both an IRD number and a rate, will also be automatic). These are welcome features.
The rate changes broadly align with the personal income tax rate reductions which will also take effect on 1 October 2010. However, the top rate of 28% will leave a still-meaningful 5% savings incentive for persons with taxable income of over $70,000 (whose marginal rate of personal income tax will be 33%).
Effective 1 April 2011, the investment income tax rate for a widely held superannuation scheme or managed fund which is not a PIE will reduce from 30% to 28% (again leaving a 5% tax advantage for higher earners).
Employer’s superannuation contribution tax (ESCT)
The personal income tax reductions will also be reflected in ESCT rate reductions applying for the first pay period ending on or after 1 October 2010. These are as follows:
|Up to $16,800
|$16,801 to $57,600
|$57,601 to $84,000
*The test here is unchanged. The threshold amount is taxable earnings plus before-tax employer superannuation contributions in the previous income year (or, if an employer did not employ a member for all of that year, its estimate of taxable earnings plus employer superannuation contributions for the current income year).
As with the current ESCT rates table, the threshold amounts up to which the lower ESCT rates apply are deliberately higher than those applying to personal income tax rates. This is to reduce the risk of overtaxing employer superannuation contributions for employees with taxable earnings near an upper limit.
The fact that the top personal income tax and ESCT rates will now be aligned at 33% will close the curtain on the current salary sacrifice savings incentive available to many higher earners. However, a more modest salary sacrifice incentive will remain, in the form of a 3% tax differential for persons with taxable earnings of between $70,000 and $84,000.
Fund withdrawal tax (FWT)
FWT was introduced in 2000 to counter avoidance of the then 39% (later 38%) top personal tax rate through:
employees and employers arranging to replace ordinary remuneration with employer contributions to superannuation funds, taxed at a maximum 33% rate, and
employees then withdrawing those contributions other than in prescribed circumstances considered to be consistent with retirement saving.
The FWT legislation has proven very complex to apply. A common lament, due partly to a lengthy list of exemptions, is that whatever fiscal gains it may have produced over the last 10 years have likely been outweighed by added administrative costs.
Due to the top personal income tax and ESCT rates now aligning from 1 October 2010, there is no longer any tax benefit to be gained from these arrangements. Accordingly, the FWT legislation has been amended to prescribe that:
all employer superannuation contributions made for pay periods ending on or after 1 October 2010 will be exempt from FWT when withdrawn, and
FWT will not apply to any withdrawal made from a superannuation fund on or after 1 October 2015.
To the extent that a withdrawal is shown to be sourced from employer contributions made during the 2010/11 tax year and the trustee cannot identify whether or not those contributions were made for a pay period ending on or after 1 October 2010, any FWT payable on withdrawal will reduce by 50%.
We are disappointed that the already complex FWT legislation will be further complicated by “grandfathering”, as potentially taxable all withdrawals of pre-October 2010 employer superannuation contributions (and earnings on those). FWT was a behavioural tax. It served that purpose well, while producing an infinitesimal additional tax take and a great deal of additional work for administrators. It should be simply repealed in its entirety.
Though FWT is still routinely described as a “5% tax”, the practical effect of recent and pending investment income tax rate reductions for superannuation funds is that FWT is now materially less than 5%. This is because FWT liability is calculated based on additional deemed investment income (under a formula which produced FWT of 5% only while investment income was still taxed at 33%).
In our 5 February 2010 Brief Counsel, we outlined some concerns with the trans-Tasman retirement savings portability provisions and KiwiSaver amendments in the Taxation Bill. We advised that we would be making submissions addressing those concerns.
The following submissions were accepted:
deletion of the requirement that fees on Australian-sourced funds be deducted first from New Zealand-sourced funds (necessitating duplicate unit prices), and
deletion of the requirement, where an invalid KiwiSaver enrolment is not validated, for any monies transferred from an Australian scheme to be transferred back to “that scheme”. The Bill now allows the affected individual (or, where necessary, Inland Revenue) to nominate another scheme should the original scheme either decline the transfer or no longer exist.
We submitted also that New Zealand complying superannuation funds should be permitted to offer trans-Tasman portability into or out of locked-in accounts. The current inter-country arrangements only refer to KiwiSaver schemes, but officials agree that in policy terms complying superannuation funds should be included, and will raise this matter with Australia.
A key provision of the draft legislation is that funds transferred to KiwiSaver from Australia can be accessed at or after age 60 provided a member meets the Australian retirement definition. Officials have confirmed that the accompanying expression “with necessary modification for KiwiSaver scheme trustees” is intended to ensure that providers need not expend resources investigating and policing every member’s eligibility for retirement:
“For example, to meet the requirement that the trustees of a KiwiSaver scheme be reasonably satisfied that an individual does not intend to become gainfully employed ever again, a statutory declaration signed by the member could be considered sufficient”.
Minors’ enrolments in KiwiSaver
The Committee has accepted that for a minor aged 16 or 17 (who must sign a membership application) only one guardian need co-sign. The Bill also now clarifies that for children under 16, agreement and joint signatures must be obtained from all guardians.Officials advise that further information regarding evidence to verify guardianship, and to verify that a child has no legal guardian, will be published in an Inland Revenue Tax Information Bulletin.We had commented that the Bill might usefully address who can exercise discretions for minors (for example as to investment choice). Officials advise that they consider membership-related discretions for under 18 year-olds can be exercised by guardians alone or, where members are aged 16 or 17, by members alone (with no need for joint signatures).
Annual reports by hyperlink
The Committee has declined our submission that for a KiwiSaver provider to be permitted to send annual reports by hyperlink, it should suffice for a member simply to have provided an email address. Officials consider that the requirement for members to give consent can be satisfied by, for example, a member ticking a check box in an email from the provider.Officials also comment that allowing non-KiwiSaver superannuation schemes to deliver annual reports by hyperlink is outside the scope of this particular Bill.
Employer exemptions from auto-enrolment rules
The Committee has accepted submissions from Chapman Tripp and Workplace Savings NZ to the effect that successors in business, and employers who transfer between master trust providers, be permitted to continue invoking their otherwise grandfathered employer exemptions from the KiwiSaver automatic enrolment rules.
Application of contract and consumer protection legislation
We had submitted that because the Taxation Bill is remedial, policymakers should take this opportunity to:
clarify that the KiwiSaver Act does not limit the application of relevant contract and consumer protection legislation, and
prescribe that, when any membership contract is cancelled, the repayment provisions relating to invalid enrolments are treated as applying.
The Committee considers this a significant issue requiring extensive research, adding that officials may consider it further as resources allow.