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The KiwiSaver Act 2006 (Act) came into force on 6 September 2006. Employers need
to familiarise themselves with the implications of the Act and ensure that proper
processes are in place
before the implementation
date of 1 July 2007.
The purpose of the Act is to "encourage a long-term savings habit and asset accumulation" via KiwiSaver schemes. The Act applies to those new employees who are subject to the automatic enrolment rules, existing employees (and the self employed) who elect to opt in and all employers who are New Zealand residents or carry on business from a fixed establishment in New Zealand.
All new employees (there are some exceptions including certain casual workers) aged between 18 and the age of eligibility for New Zealand superannuation (currently 65), will be automatically enrolled in a KiwiSaver scheme (but can choose to "opt out"). In addition, any existing employees can choose to "opt in" to a KiwiSaver scheme.
Contributions to a KiwiSaver scheme will be deducted from the employee's gross salary or wages at the rate of 4 per cent (or 8 per cent at the employee's option). The 4 per cent or 8 per cent contribution to a KiwiSaver scheme can consist of contributions made solely by employees or by contributions by both employee and employer or by contributions solely by the employer (but any employer contributions which make up the 4 per cent minimum must vest immediately).
We encourage employers to consider the following issues and contact us for more information and assistance.
Relevant Considerations for Employers
Before 1 July 2007, employers need to consider:
a) Whether they can, or wish to, qualify for "exempt employer" status.
b) Whether to choose a preferred KiwiSaver scheme provider for participating employees who do not make their own selection or rely on the Inland Revenue Department (Inland Revenue) to select a default provider.
c) Whether to make employer contributions to their employees' KiwiSaver schemes (by way of salary sacrifice or otherwise). This option has recently been given more prominence after the announcement that employer contributions to KiwiSaver schemes (up to the lesser of 4 per cent of salary or wages or the employee's contribution) will be exempt from superannuation scheme contribution withholding tax (SSCWT).
Whether the incentives provided will encourage their employees to participate in KiwiSaver. In addition to the savings in SSCWT, the Government is providing employees who join a KiwiSaver scheme with a $1,000 "KickStart" to their savings scheme, a first home deposit subsidy, an option to withdraw funds to assist in the purchase of their first home and the ability to divert up to half of their employee (not employer) contributions for mortgage repayment on a principal residence.
The development of systems to ensure the requirements of the Act are met in a timely and accurate manner.
Exempt Employer Status
The Act provides that any person who commences employment with an exempt employer is exempt from the automatic enrolment rules under the Act. Employers will be eligible for an exemption where their employees are provided with access to a superannuation scheme that complies with specified requirements under the Act.
To be an exempt scheme, the scheme must meet the following requirements:
a) Be a registered superannuation scheme.
b) Provide each permanent employee (aged between 18 and 65) with an opportunity to become a member.
c) Provide employees with the ability to transfer any benefits accumulated under any other scheme (from which a transfer is possible).
d) Enable any employee who satisfies the withdrawal requirements under that scheme to transfer any accumulated benefits to a KiwiSaver scheme (or another registered scheme).
e) Provide that contributions must be equivalent to at least 4 per cent of the annual gross base salary or wages of the employee – any employer contributions will not count towards this 4 per cent minimum requirement unless the employee is legally entitled to require the employer to contribute that amount and the trust deed of the scheme provides that it vests completely in the employee prior to the sixth year of membership.
If the employer scheme is a "defined benefit scheme" that does not satisfy the 4 per cent minimum amount rule, the employer will still qualify for exemption if the value of any accrued benefits in that scheme is increasing during each membership period by at least 4per cent of the annual gross base salary or wages. In addition, where an employer provides access to a superannuation scheme for its employees that has been established under a master trust, the employer is also eligible for exemption if the master trust satisfies the requirements set out above (insofar as the trust relates to the employer's scheme).
However, it is important to note that even if the employer has exempt status under the Act, that exemption does not prevent an employee from "opting in" to a KiwiSaver scheme. Therefore, every employer will still need to set up systems to deal with employees who wish to "opt-in" to a KiwiSaver scheme.
Choosing a KiwiSaver Scheme Provider
Employees may elect the KiwiSaver scheme in which they wish to invest their KiwiSaver contributions. If they do not make an election, and their employer has not chosen a preferred KiwiSaver provider, their contributions will automatically be passed to one of a number of default providers appointed by the Minister. The default KiwiSaver scheme providers are yet to be announced; and the fees of default providers are likely to be very competitive.
The KiwiSaver Websites
Employers will also need to become familiar with the KiwiSaver systems (some of the processes are discussed in more detail below). We recommend that employers also take a look at the Inland Revenue's website: http://www.ird.govt.nz/kiwisaver. This website is due to go live from mid-October 2006.
Employers should also encourage their employees to take a look at http://www.kiwisaver.govt.nz, which will be a website designed specifically for employees. This website is also due to go live from mid-October 2006.
Training Staff
Employers will need to ensure that their HR personnel/staff are familiar with the KiwiSaver processes. For example, it may be beneficial to develop guidelines to ensure staff are complying with the systems prescribed by the Inland Revenue.
Employer Contributions
Employers are not required to make contributions. However, employers may wish to consider whether they would like to do so. This will involve an assessment of the market place in which each employer operates, their employment philosophy and whether it is in the employer's interests to be contributing in the case of employees who wish to participate, (and whether or not on a salary sacrifice basis only). The Act makes it clear that the minimum contribution of 4 per cent may be made up of employee and/or employer contributions (provided mandatory employer contributions make up the 4 per cent minimum). However, only by the employee contributing 4 per cent and the employer contributing a matching 4 per cent will the maximum tax benefit be achieved – the employer's 4 per cent will not be subject to SSCWT. The benefit of employer contributions are generally locked in until age 65.
Employee Contributions
It is anticipated that 50per cent of employee contributions will be able to be accessed earlier than 65 years of age provided those funds are diverted to repayment of a mortgage over the employee’s principal residence. Details of the mortgage diversion proposal are yet to be announced.
Withdrawals of employee contributions may also be made where any of the following apply:
a) Employees wish to do so for the purchase of their first home that is to be used as their principal residence (provided they have made contributions for at least three years).
b) Employees are suffering significant financial hardship.
c) Employees are suffering a serious illness.
Employees decide to permanently emigrate from New Zealand.
Important KiwiSaver Processes for Employers
Commencement of a new employee
Every new employee is required to give notice to the employer of his or her name and address, his or her IRD number, whether or not he or she is already a member of a KiwiSaver scheme and, if so, provide a deduction notice or a copy of the contributions holiday notice granted by the Inland Revenue. The employer must provide this information to Inland Revenue no later than the date of the next monthly schedule (ie the 20th day of the following month).
Inland Revenue is required to supply information packs to the employer. The employer must then supply those information packs to new employees within seven days of the employee starting employment or, where an existing employee opts in, within seven days of the employee giving the employer a deduction notice or to any employee who requests an information pack.
In addition to this requirement, the employer (where the employer's choice of KiwiSaver scheme is effective) must also supply the employees (at the same time) with an investment statement and a statement providing that, if the employee does not choose a scheme, the employee will be allocated to the employer's chosen scheme (rather than to a default scheme).
The employee must decide whether to select a scheme provider, accept the employer's chosen scheme (if there is one), not select at all and be allocated to the default scheme, or opt out of the KiwiSaver scheme. If the employee informs the employer of the decision to opt out, the employer must cease deductions and advise Inland Revenue. Inland Revenue will then issue an Opt-out Notice to the employer and the employee and send a refund of contributions made to date to the employee (and, if applicable, the employer).
Overpayments
If the employee or employer identifies an overpayment, they should discuss this at the outset. The employer must give notice to the Inland Revenue of this information no later than the date of the next monthly schedule (ie the 20th day of the following month). Inland Revenue will then distribute any refund to the employee (and, if applicable, the employer).
Contributions Holiday
Twelve months after commencing contributions, an employee may request a contributions holiday by communicating directly with Inland Revenue. Where Inland Revenue approves the contributions holiday (for a minimum of three months or maximum of five years), the employer will be sent a Contributions Holiday Start Notice.
One month before the expiry of the contributions holiday Inland Revenue will notify the employee directly. The employee can either request a new contributions holiday or do nothing. If the employee does nothing, Inland Revenue will send the employee and the employer a Contributions Holiday End Notice. The employer will then resume contribution deductions from the date notified by Inland Revenue.
For more information on KiwiSaver, please contact:
Neil Cameron
John Rooney
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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