Taxation Bill & Superannuation

Reprinted with permission from ACP Media. (SuperScoop Newsletter )

SUPERSCOOP NEWSLETTER - November 2007; Chapman Tripp.

The Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill was reported back from the Finance and Expenditure Committee on 15 November 2007, and when this SuperScoop went to press the Bill was having its Second Reading. The reported back Bill introduces some refinements and new measures related to the changes to the KiwiSaver and complying superannuation fund regimes introduced in Budget 2007.

The Bill contains a number of new amending proposals in response to Select Committee submissions and other commentary. We think that, looked at collectively, those will make the KiwiSaver and complying superannuation fund regimes more provider and employer friendly than before.

However, some of the changes are material, and we do not expect the amendments to be enacted before mid-December. We consider that providers could usefully be given (as with the post-Budget law changes) a “grace period” post-enactment during which they are protected against breaches of Securities or consumer protection legislation by reason of using existing offer documents and advertisements. The Bill as currently drafted does not contain such a provision.

In this SuperScoop, we outline some of the headline points from the reported back Bill. Proposed legislation is always subject to change (customarily at the Committee of the Whole House stage) so this is not the last word on the matters addressed!

Compulsory employer contributions

The scope for employees to “double dip” (i.e. require employers to contribute to a KiwiSaver or complying superannuation fund as well as an existing scheme) is significantly reduced.
Under the reported back version of the Bill, employer contributions in respect of an employee can count towards compulsory employer contributions if:

(a) The amounts are paid or credited to a scheme registered before 7 May 2007 (or to a successor scheme of such a scheme, to which relevant members have transferred by virtue of section 9BAA of the Superannuation Schemes Act 989);

(b) The employer provided employees generally with access to that scheme (or its predecessor) before 7 May 2007;

(c) The employee is either:

(i) Employed before April 2008, and the employer makes or agrees to make contributions for the employee to the scheme before that date; or

(ii) Covered by a collective agreement that is in force before 7 May 2007 and expires after April 2008 under which the employer is required to make the contributions; and

(d) Vesting requirements are satisfied.

It appears that contributions will only count to the extent that those contributions vest by the end of the employee’s first five years of membership. However, in our view, the wording in the Bill could be amended to better reflect this intent. Voluntary employer contributions to a KiwiSaver scheme or complying superannuation fund will also count towards compulsory employer contributions.

Definition of “salary or wages”

The “salary or wages” definition in the KiwiSaver Act 2006 is critical to the formula for calculating compulsory employer contributions. It also impacts the amount of employee contributions to KiwiSaver schemes and complying superannuation funds.

The new definition under the reported back version of the Bill excludes redundancy payments, accommodation benefits, and taxable allowances for accommodation and living costs overseas.

The new definition also makes plain that “salary or wages” includes weekly ACC compensation and parental leave payments. However, for the purposes only of compulsory employer contributions, weekly ACC compensation and parental leave payments are excluded.

For the purposes of calculating employee contributions to complying superannuation funds, and matching employer contributions to those funds, the minimum multiplier will now continue to be gross base salary or wages (as opposed to gross salary or wages). We welcome this confirmation.

Transitional rules

The initial version of the Bill proposed removing, from April 2008, the ability for employer contributions to count towards the employee’s minimum 4% contribution rate if the employee so elects. However, employees who had already entered into such arrangements prior to April 2008 would be able to gradually phase in employee contributions at the standard minimum contribution rate.

The reported back version of the Bill allows employees to enter into such arrangements with their employer at any time. Employees will be able to contribute 2% until 3 March 2010, 3% until 3 March 2011 and then 4% from April 2011 (with matching employer contributions in each of those periods).

Some employer contributions not to be paid via Inland Revenue

The Bill now provides for employer contributions to a KiwiSaver scheme made for purposes other than retirement benefits to be paid directly to the provider of the scheme (as opposed to the Inland Revenue). This change affects contributions made to cover, for example, life insurance premiums and contributions to the cost of the scheme itself.

Invalid memberships

The reported back version of the Bill proposes that invalid enrolments can (at the Commissioner of Inland Revenue’s discretion) be subsequently validated when a person later meets the relevant requirement in the KiwiSaver Act (e.g. satisfies the residency requirements or falls within the automatic enrolment rules). It is proposed that the opt-out mechanism can apply to persons who are not eligible to be members of KiwiSaver.

Where a person cannot opt out, and his or her membership of KiwiSaver cannot be (or is not) subsequently validated by the Commissioner, refunds can occur.

The applicable refund amount paid by the provider to Inland Revenue will be the current market value of the investment at the time the refund is paid – another welcome clarification.

Inland Revenue will refund to the invalidly enrolled person their own contributions, with interest at the interest rate applicable to KiwiSaver balances held by Inland Revenue. Any employer contributions will be refunded by Inland Revenue to the employer in the first instance, for the employer and employee to decide who is the final recipient.

Any gains or losses between the current market value of the invalidly enrolled person’s investment and contributions (plus interest) that have been paid will be borne by the Crown, and not providers or members of KiwiSaver schemes.

Tax credits

The reported back Bill clarifies a number of aspects of the tax credits regime. The most recent changes include:

(a) Contributions held by Inland Revenue that are paid out to a person if they close their KiwiSaver membership (for death, serious illness or significant financial hardship) are also counted in the calculation of member tax credits;

(b) When a member permanently emigrates and transfers all funds in the KiwiSaver scheme to an approved foreign superannuation scheme (as with cashing up the balance), the nominal value of the member tax credit is repaid to the Crown;

(c) Employer contributions will start from the first pay on which an employee contribution deduction is made, and eligibility for the employer tax credit is tied to the same date;

(d) Private domestic workers are given the option of electing to make compulsory employer contributions, and if they choose to do so then they will also receive the employer tax credit; and

(e) Member tax credits (and other government contributions) and employer contributions are allocated according to the member’s investment directions that are in force at the time the relevant contribution is received by the provider.

Mortgage diversion facility

The mortgage diversion facility (provided for under the KiwiSaver Act and Regulations) is now extended to complying superannuation funds. This means that contributions may be withdrawn by a member from a KiwiSaver scheme or a complying superannuation fund to pay amounts secured by certain mortgages relating to the member.

“Second-chance” home buyers

An amendment has been proposed (but not yet included in the Bill) allowing “second-chance” home buyers that are in the same financial situation as first home buyers to make an early withdrawal from a KiwiSaver scheme. It is also proposed that the KiwiSaver housing deposit subsidy facility cover those persons. “Second-chance” buyers will need to have a determination from Housing New Zealand to that effect.

Member statements and annual reports

The Bill requires all KiwiSaver and complying superannuation scheme providers to supply members with an annual personalised statement of specific details of their investment holdings. If the member agrees, this may be sent electronically.

Annual reports for complying superannuation funds must include a summary of any amendments to the trust deed that have been made since the date of the last annual report. The Bill proposes that the summary must include any new participation agreements or amendments to existing participation agreements if (under the terms of the trust deed) participation agreements form part of, or determine any of the terms of, the trust deed.

Responsible investment

The Bill incorporates changes that were proposed in a supplementary order paper in early September 2007, requiring KiwiSaver schemes and complying superannuation funds to disclose their responsible investment policies from April 2008.

Investment statements for these schemes must contain one of two possible statements. The first is that responsible investment is taken into account in the scheme’s investment policies and procedures (directing the reader to an explanation on the issuer’s website, or which is otherwise available). The second possible statement is the converse - i.e. that responsible investment is not taken into account.

Both statements potentially raise issues for scheme trustees in terms of their duty to act in the best financial interests of scheme members.

Offer documents and advertisements

As noted above, the Bill does not propose any carve-out for existing offer and advertising materials and, on that basis, those should be carefully reviewed as soon as practicable.

For additional measures in the reported back Bill that specifically affect employers click here see our Employment Special Bulletin.

Please note we are proposing early in 2008 to produce an updated edition of our publication, Superannuation and KiwiSaver legislation, which will be revised to include all pending amendments referred to in this SuperScoop.

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