Australia: Kiwisaver Changes

During the 2008 election campaign, the National Party promised a number of changes to KiwiSaver. These changes have been implemented by way of an amendment to the KiwiSaver Act. This amendment was introduced by the Taxation (Urgent Measures and Annual Rates) Bill (Bill), which was tabled in Parliament on Tuesday 9 December and passed into law on Thursday 11 December.

All of the KiwiSaver changes will be in force by 1 April 2009.

What isn't changing

Many elements of KiwiSaver remain unchanged. New members will still receive the $1,000 kick start. Automatic enrolment, the first home deposit subsidy, optional contribution rates of 4% and 8%, the mortgage diversion scheme and contribution holidays also remain unchanged.

The member tax credit will continue to match member contributions dollar for dollar, up to the amount of $20 per week. Anyone earning less than $52,000 per year will need to contribute additional amounts over and above the new minimum contribution rate of 2% to receive the full benefit of the member tax credit.

What is changing

A minimum contribution rate of 2%

KiwiSaver members are currently required to contribute 4% of their gross salary or wages to their KiwiSaver scheme. With effect from 1 April 2009, the minimum contribution rate for members will reduce to 2%. The default contribution rate for members who are automatically enrolled will continue to be the minimum contribution rate (ie 2% from 1 April 2009).

All members who contributed at a rate of 4% prior to 1 April 2009 will continue to have contributions deducted at this rate. Members remain entitled to change their contribution rate by giving notice to their employer.

A compulsory employer contribution rate of 2%

Employers are currently required to make a compulsory contribution towards an employee's KiwiSaver scheme of 1%. Under the regime as it currently exists, the compulsory employer contribution rate would have increased by 1% per year, until 2011, where it would remain at 4% thereafter. With effect from 1 April 2009, employers will still be required to make a compulsory contribution at a rate of 2%, however, the compulsory employer contribution rate will not increase further in subsequent years.

Both employees and employers may still elect to contribute at a higher rate.

Member fee subsidy

The Government currently subsidises KiwiSaver fees by contributing $40 a year (two six monthly payments of $20) to member accounts. There will be no fee subsidy for members who join KiwiSaver after 31 March 2009 and fee subsidies for existing members will cease when the second six monthly payment for the year in respect of the member has been paid.

Discontinuing the employer tax credit

Currently, employers receive a tax credit of up to $20 a week for contributions made to an employee's KiwiSaver scheme. With effect from 1 April 2009, the employer tax credit will go.

Employer Superannuation Contribution Tax (ESCT) exemption capped at 2%

Currently, employer contributions to an employee's KiwiSaver scheme of up to 4% of the relevant employee's salary or wages are exempt from ESCT, provided a matching contribution is made by the employee. Under the new regime, the ESCT exemption will only apply to the minimum compulsory employer contribution of 2% of the relevant employee's gross salary or wages. Any additional employer contributions will be taxed at a rate of up to 33%.

Total remuneration back on the table

The Government has repealed the September Employment Relations Act amendment relating to KiwiSaver. This amendment was introduced to ensure that compulsory employer contributions were paid on top of an employee's gross salary or wages. This effectively prevented employers from offering alternative remuneration in lieu of compulsory employer contributions to employees who do not join KiwiSaver.

Employment Relations Act

The September Employment Relations Act amendment provides that employers cannot refuse to offer or afford to an employee the same terms of employment (including gross salary or wages) as are made available for other comparable employees employed in the same or substantially similar circumstances by reason of that employee being a member of a KiwiSaver scheme. The repeal of the relevant sections in the Employment Relations Act passed into law on 12 December 2008.

KiwiSaver Act

Section 101B(4) of the KiwiSaver Act has been amended in order to ensure that compulsory employer contributions must be paid on top of an employee's gross salary or wages unless otherwise agreed between the employer and the employee.

The amended section is back dated, taking effect from 13 December 2007.

The section provides that, on and after 13 December 2007, employers and employees will be able to factor KiwiSaver compulsory employer contributions into their employment agreements. This part of the section is unchanged.

The amendments to the section provide that, for an employee who joins a KiwiSaver scheme after the date on which the Taxation (Urgent Measures and Annual Rates) Act receives Royal Assent, unless the employment agreement already accounts for compulsory employer contributions, compulsory employer contributions must be paid in addition to the employee's gross salary or wages.

It is important to note that the change to this section of the KiwiSaver Act will not have any practical effect until changes are made the Employment Relations Act.

How will these changes affect you as an employer?

• You will no longer receive a tax credit for KiwiSaver compulsory employer contributions.
• You will not be required to contribute more than the 2% compulsory employer contribution to an employee's KiwiSaver scheme.
• You will be required to deduct ESCT on any employer contributions you make to an employee's KiwiSaver scheme in excess of the 2% compulsory employer contribution.
• Your contributions to employees' KiwiSaver schemes may be back on the table in terms of total remuneration negotiations, meaning you can factor compulsory employer contributions into your employment agreements.

What steps should you take to prepare for these changes?

• Ensure payroll systems or payroll providers are ready to make the correct KiwiSaver deductions, employer contributions and ESCT deductions at the correct rates by 31 March 2009.
• Review employment agreements for new employees and prepare to update these to reflect the new minimum contribution rates and any changes to the total remuneration package you might offer.
• If you have a preferred KiwiSaver provider, request that they confirm that your participation agreement accurately reflects your present and future contribution obligations.

How will these changes affect you as a KiwiSaver provider?

• The minimum contribution rate for members and the compulsory employer contribution rate will be 2% from 1 April 2009.
• For members who join after 31 March 2009, the Government will not contribute a fee subsidy. The last fee subsidy payments for members who joined prior to 1 April 2009 should be received by 31 December 2009.

Transition period

• A general limited exemption from compliance with legislation relating to disclosure documents will be introduced, and will apply through to 14 February 2009.
• A limited exemption allowing the use of an insert for investment statements dated before 1 January 2009 will apply until 30 June 2009.

What steps should you take in order to prepare for these changes?

• Review your disclosure documents and application forms and be prepared to update these to accurately reflect the relevant changes to the KiwiSaver regime.
• Review systems to ensure that they will be able to process payments and credits based on the new minimum contribution rates and the removal of the fee subsidy.
• Review your KiwiSaver fund trust deed, including any participation agreements, and (if necessary) be ready to prepare amendments to ensure the new minimum contribution rates can be facilitated.
• Review any existing or planned advertising to ensure that it is up to date and not misleading.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.