BUDGET PREVIEW: Changes to KiwiSaver: are there more to come?

(This is part one in a series in which tax experts preview the May 24 budget. For NBR's collected budget coverage, bookmark www.nbr.co.nz/budget-2012, or click the Budget 2012 block on our home page - Editor.)

With only six weeks until the 2012 budget, anticipation is high. What will the major issues addressed this year be?

We don’t know – except that the government’s overriding goal is to return to surplus by 2014-15.

Last year’s budget proved it is serious about reducing its spending.

A number of changes – some of which came into effect on April 1 - have been introduced to achieve this.

We can expect more this time.

The most notable recent change was to KiwiSaver.

Employer contributions which had enjoyed an exemption from tax no longer have this immunity.

The government has removed the exemption introduced as part of KiwiSaver, which means an employer’s minimum 2% contribution of an employee’s gross pay is taxed.

It is also halving its dollar-for-dollar contribution, up to $1042 a year, to 50 cents and to a maximum of $521.

The government introduced these changes in a bid to be more fiscally responsible.

With the economy still looking uncertain and the goal of returning to surplus by 2014-15 looming, a significant decrease in expenditure is necessary.

Purse strings across the board have been tightened considerably.

While these changes have been good for the government’s balance sheet, they haven’t been so positive for workers or employers.

Employees will now have less money going into their KiwiSaver account each week.

And employers have been burdened with the extra administrative task and compliance cost of calculating and paying ESCT, on top of the existing ACC, PAYE, employer KiwiSaver, employee KiwiSaver, student loans and child support deductions.

The response to these changes was somewhat muted, especially from employees.

My assumption is that many people haven’t even noticed the changes – stemming from the fact so many New Zealanders appear to be apathetic about KiwiSaver.

Some people are only enrolled in the scheme because they were automatically signed up when they started a new job.

Many employees don’t actively follow the progress of their KiwiSaver account – and this apathy is what the government was banking on when it made these behind-the-scene changes.

So what will the effects of these changes be on the KiwiSaver scheme?

The tax break on employers’ contributions was initiated as an incentive to get people on board and was one of the key reasons for its success ­– almost 1.9 million people are enrolled.

It is unlikely these changes will put off employees from opting into the scheme in the future.

They will still receive the $1000 kick-start and, while the government has reduced their contribution, anyone enrolled still gets an extra $521 they wouldn’t receive otherwise.

The government wants people to save for their retirement but are just less willing to contribute as much to our savings.

The next known change to KiwiSaver is that the minimum employer contribution will rise to 3% on April 1 next year.  

Are further changes likely?

The budget will no doubt be formed around the return to surplus target.

With this increased pressure to save money, who knows what other KiwiSaver elements may be at risk.

Other changes from last year’s budget that came into effect on April 1 included changes to ACC rates, Working for Families and student loans:

ACC:

• The earners’ levy is now set at $1.70 (GST inclusive), down from $2.04 the previous year.
• The minimum liable earnings for self-employed workers has increased from $26,520 to $27,040.
• The maximum liable earnings has increased for:
• Self-employed people under the Work and Earners’ Account from $110,018 to $111,669.
• Employees, private domestic workers and earners other than self-employed under the Work and Earners’ Account from $111,669 to $113,768.
• Employees and private domestic workers for calculating the residual portion of the Work Account from $110,018 to $111,669.

Working for Families

• The abatement rate will increase by 1.25 cents at every inflation adjustment round from  April 1, 2012, until it reaches 25 cents in the dollar.
• The current abatement threshold of $36,827 has also been decreased by $477 to $36,350 (and will continue to reduce by $450 at subsequent inflation adjustment rounds until it reaches $35,000).

Student loans

• New student loan repayment codes have been introduced and require employees to add “SL” to tax codes unless they are exempt.
• Those repaying student loans will no longer be able to use a special tax code to change the amount of student loan repayment deductions from salary or wages. However, there are some exceptions to this including:
• Student loan special deduction rates for secondary income.
• Student loan repayment deduction exemption for full-time students.
• Making extra repayments through salary or wages.
• Employers may also need to use the new student loan repayment codes for extra deductions made on salary or wages:
• SLBOR, used to identify extra repayments made through employers.         
• SLCIR, used if significant under-deductions have been made and the employee is required to make catch-up deductions.

Geordie Hooft is a partner specialising in tax and privately held business at Grant Thornton. Email: geordie.hooft@nz.gt.com