The KiwiSaver changes in the Budget will make the scheme more sustainable and – from 1 April 2013 – will leave employed KiwiSavers only modestly worse off in terms of their overall savings incentives.
KiwiSaver will also have a stronger workplace focus.
Member tax credits
The maximum member tax credit contribution from the Government (MTC) will reduce from $1,042 a year to $521 a year for the KiwiSaver year ending 30 June 2012.
This means that (when averaged on a weekly basis for illustration purposes) the MTC will reduce from $20 to $10 a week.
The rate at which MTCs match a member’s contributions will also reduce from a $1 for $1 match to 50c for every dollar contributed. This means that to receive the maximum $521 MTC a member will still need to contribute $1,042 every KiwiSaver year (1 July to 30 June).
The current tax exemption on compulsory employer contributions to KiwiSaver will cease effective 1 April 2012. From this date the 2% employer contribution will have employer’s superannuation contribution tax (ESCT) deducted from it at a broadly PAYE-equivalent rate depending on the employee’s income level. Only the remaining net amount will be paid to KiwiSaver.
This is the one change that was completely unheralded in last week’s announcements.
However the negative impact of the removal of the ESCT exemption will be more than compensated for, after a one year lag (from 1 April 2013), when the compulsory minimum employer contribution rate increases from 2% to 3% of salary or wages. Following this change, employed KiwiSavers will receive slightly increased employer contributions to their accounts even after deducting ESCT.
From 1 April 2013, the compulsory minimum employee contribution rate will also increase from 2% to 3%, including for existing members. Three percent will also become the default employee contribution rate for those auto-enrolled (with the 4% and 8% options and, it seems, the contribution holiday facility intact).
What won’t change
The $1,000 kickstart contribution for new joiners will remain.
The worked examples accompanying the Budget announcements also clarify that the targeted first home deposit subsidy of up to $5,000 will be retained.
Chapman Tripp commentary
KiwiSaver as modified in these terms feels more intuitively sustainable, and from 1 April 2013 the changes made will leave employed KiwiSavers (at all income levels) only modestly worse off in terms of the overall employer and Government savings incentives.
KiwiSaver will clearly be a much more workplace-focused scheme if these changes proceed. The only incentive that self-employed and non-employed KiwiSavers will now have after joining KiwiSaver will be the maximum $521 a year MTC.
But, overall, these changes leave KiwiSaver intact (with war wounds) from the perspective of members, employers and KiwiSaver scheme providers.
We also note with interest that the Budget refers approvingly to the Savings Working Group recommendation of a one-off auto-enrolment exercise in the future whereby all employed persons who have not yet joined KiwiSaver are automatically enrolled (with opt-out entitlements) in one fell swoop. The Government intends discussing this recommendation with employers post-budget to “look at how that might be done without unnecessary compliance and administrative costs.”
Disclosure relief for providers
The Taxation (Annual Rates and Budget Measures) Bill, which has already been introduced, includes transitional protection for KiwiSaver providers against securities law breaches. This means that KiwiSaver schemes can remain open to new subscribers and will have a reasonable period to amend their offer documents.
The Financial Markets Authority has stated that in the meantime it expects KiwiSaver providers to take all practicable steps to ensure that potential investors are fully informed of the changes, including information on provider websites, through adviser networks and through investment statement supplements.
The Bill protects providers against non-compliance with any securities-related statute if it starts before 31 July 2011 and does not continue on or after that date, or if it relates to:
- a prospectus registered before 27 May 2011, or
- an investment statement dated before 27 May 2011.
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