KiwiSaver – It's compulsory for employers…
The KiwiSaver Act 2006 ("Act") was enacted on 6 September
2006. Although KiwiSaver is a voluntary work-based savings plan
for employees, employers have compulsory obligations under the Act. As
the Act is likely to be in force on or after 1 July 2007 employers
should start becoming familiar with their obligations under the Act
and begin to put procedures in place.
KiwiSaver is designed to make it easy for New Zealanders to save. The
purpose of this Act is:
"to encourage a long-term savings habit and asset accumulation
by individuals who are not in a position to enjoy standards of
living in retirement similar to those in pre-retirement. The
Act aims to increase individuals' well-being and financial independence,
particularly in retirement, and to provide retirement benefits."
The KiwiSaver scheme
The Inland Revenue will administer the scheme through the PAYE tax
system and will forward contributions to the participant's KiwiSaver
scheme to be invested.
Under the scheme, employees must contribute a minimum of 4% (or they
can contribute 8%) of their gross base salary or wages. Employers
can help employees to save by providing part or all of an employee's
contribution, which can count towards the employee's minimum 4% contribution.
A last minute change to the scheme means that employer contributions
will be exempt from Specified Superannuation Contribution Withholding
Tax (SSCWT). This tax is usually applied on any monetary contribution
to a superannuation fund that is paid by the employer for the employee's
benefit. Removing this tax from employer contributions is a further
incentive, provided by the government, which is likely to make the
scheme more attractive to employees. The tax exemption, however,
is capped at 4% of the employer's contribution.
Participants have access to their funds when they reach the age of
New Zealand superannuation eligibility (currently 65) or after five
years, whichever is later. Funds can be withdrawn early only
in certain circumstances such as significant financial hardship, serious
illness, death or permanent emigration.
As an incentive to participating in KiwiSaver the government will
contribute $1,000 to each person's account. This amount is 'locked
in' and cannot be withdrawn early under any circumstances. The
government will also make an annual contribution to each participant
for fees charged by their scheme's provider.
The government has recognised the importance of purchasing a home
by creating number of options within KiwiSaver. There is a mortgage
diversion option, where after 12 months a participant can choose to
have up to half of their regular contribution to go towards their mortgage.
This does not include any employer contributions. A further measure
to assist with buying a home is that after three years of being a participant
to a KiwiSaver scheme, a one-off withdrawal can be made towards a deposit
for a first home (criteria will apply) and the government will offer
(to qualifying KiwiSaver participants) a first home subsidy of $1,000
for each year of membership in the scheme, up to a maximum of $5,000
for five years.
Who does KiwiSaver affect?
New employees will be automatically enrolled into a KiwiSaver scheme. They
then have eight weeks to decide whether they remain as participants
or they may choose to 'opt-out'. Some people will be excluded
from automatic enrolment: employees under 18 or 65 and over, 'temporary'
employees, ACC recipients, receivers of paid parental leave, election-day
workers and private domestic workers. For those automatically
enrolled, the deductions are made from their first pay and if they
do 'opt-out' the deductions already made will be refunded.
The Act has defined 'temporary' employees as those who are employed
for a period of less than 28 continuous days and those who are considered
casual agricultural workers under the Income Tax Act 2004. Employers
who employ 'temporary' staff must on the 29th day of employment, if
a 'temporary' employee is still employed, fulfil their obligations
under the Act.
Those who are not automatically enrolled (such as existing employees)
have the ability to 'opt-in' and they must notify their employer if
they wish to do so. Self-employed people, beneficiaries and independent
contractors must contact the Inland Revenue and pay them directly or
pay their KiwiSaver scheme directly.
What are employer's obligations?
Employers have a number of obligations under the Act. Although
KiwiSaver has been designed to keep compliance costs down, employers
need to be aware of their obligations to avoid incurring penalties
under the Act.
Although KiwiSaver is silent on what information employers should
give to current employees, it is likely that the Employment Relations
Act 2000 ("ERA") creates a positive obligation on employers
to give information to current employees about KiwiSaver and the benefits
it can offer. This is because the ERA requires employers "to
be active and constructive" and "responsive and communicative".
Employers must provide new employees with a KiwiSaver information
pack when they start their employment if the employer is satisfied
that the employee should be automatically enrolled. They must
then provide Inland Revenue with the names, IRD numbers and addresses
of all new employees and those who want to join KiwiSaver. This
information must be provided at the time the employer is next required
to deliver a monthly schedule to the Commissioner of Inland Revenue
in accordance with their obligations under the Income Tax Act 2004.
Employers must then deduct, with the employee's PAYE, the KiwiSaver
contributions from the employee's pre-tax pay and forward the contribution
to Inland Revenue along with the PAYE. The deductions must start
from the employee's first pay. If the employee subsequently decides
to "opt-out" the employer has the responsibility of checking
employees 'opt-out' forms and then sending them on to Inland Revenue. If
an employee decides to 'opt-out' the employer will need to stop the
deductions from their pay and must refund any contributions that have
not yet been passed on to Inland Revenue.
Employers can choose a preferred KiwiSaver provider for their employees. This
means that if an employee does not choose their own scheme they will
become a participant of their employer's preferred scheme as opposed
to a default scheme allocated by the Inland Revenue. This creates
an obligation on the employer to provide an investment statement to
all new employees and those who 'opt-in'.
After 12 months of participating in a KiwiSaver scheme, participants
are able to apply for a contribution holiday. The minimum period
for a contribution holiday is three months and the maximum is five
years. After a contribution holiday Inland Revenue will notify
the employer to re-commence deductions unless the participant applies
for another contribution holiday. Participants are only able
have a contribution holiday in the initial 12 months for reasons of
financial hardship.
Existing employer superannuation schemes
There are several options to those employers who already offer access
to a superannuation scheme. As KiwiSaver schemes will have the
incentive of employer contributions being exempt from SSCWT, employers
may want to convert their existing scheme to a KiwiSaver scheme, add
KiwiSaver to their existing scheme or establish a KiwiSaver scheme
under an umbrella trust deed.
Alternatively, employers can apply for an exemption from the automatic
enrolment requirements of KiwiSaver. To qualify as an exempt
employer the current scheme must be:
- a registered superannuation scheme;
- be transferable (i.e. the employee's balance can be transferred
to the scheme when they start their employment and transfers to other
schemes when they leave);
- open to all new permanent employees;
- have a total contribution rate of at least 4% of the employee's
gross base salary or wages; and
- have employer contributions that count towards the employee's minimum
contribution of 4% vesting fully in the employee on or within five
years of the employee becoming a participant.
Employees of exempt employers will not be entitled to receive the
$1,000 government initial payment or be eligible to subsidised scheme
fees. They will, however, still be entitled to apply for the
first home deposit subsidy if they meet the qualifying criteria.
What can employers do to get ready for KiwiSaver?
- Employers who already have a superannuation scheme in place will
need to consider whether they apply to the Government Actuary to
be exempt from automatic enrolment rules. This may require
changes to their existing scheme to make it compliant with the
Act.
- Employers will need to consider whether they choose to have a
preferred KiwiSaver provider so that those employees who do not
choose a scheme will become participants of the employer's preferred
scheme as opposed to a default scheme allocated by the Inland Revenue.
- Decide whether they will contribute to an employee's scheme to
take advantage of the exemption from SSCWT on that portion of the
employer's contribution.
- Ensure that the status of staff categories are unambiguous (i.e.
whether they are casuals, temporary (for the purposes of KiwiSaver
or otherwise) or permanent).
- Familiarise themselves with new payroll specifications which
the Inland Revenue is currently working on. They will provide employers
with information on the key changes before KiwiSaver starts. Once
this is available, employer's payroll systems will need to be adjusted
accordingly.
- We recommend that employment agreements are amended to include
an acknowledgment by all employees that they have been given an
information pack.
Now that the Act has been passed, regulations governing
matters such as the mortgage diversion facility, default KiwiSaver
providers and prescribing forms will follow in due course. We
will keep you informed about any developments.
For more information, please contact:
Erin Davies
Partner
t: +64 9 979 2177
m: +64 29 622 2300
e: Erin Davies
Last updated: 15 November 2006
This article is intended to be brief in nature and should be used for information only. It should not be relied on as legal advice. |
