KiwiSaver Employee Tax Credit

These notes are taken from the IRD document Special report on KiwiSaver changes published on 21st December 2007.

BACKGROUND

The government announced in Budget 2007 a number of changes to KiwiSaver that significantly increase the incentives to join and to continue making regular contributions.

A key change is a tax credit to members that matches their contributions to a KiwiSaver scheme, or a complying superannuation fund, up to a maximum of $20 per week. The legislation giving effect to the member tax credit was enacted in May, in the Taxation (KiwiSaver and Company Tax Rate Amendments) Act 2007, and applies to contributions made from 1 July 2007.

DETAILED ANALYSIS

MK1 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 OB1. 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:

A transitional rule applies 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 treats membership as beginning on the first of the month in which a provider receives a valid application for membership from a person if contributions are received by either Inland Revenue or the provider during the period 1 July to 31 October 2007.

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 $1042.86. If the person does not met 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 1042.86 div 365 (2.857 per day).

A new definition of "member credit contributions" is 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.

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.

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.

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 allocated.

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 contribution 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 information for complying funds.)

The actual process for claiming the member tax credit is still being developed by Inland Revenue and providers. It 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 such information and will 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 complying superannuation fund providers may not always hold the relevant IRD numbers for their members, an amendment enables complying superannuation funds 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.

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:

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.