Seasons Greetings
The ASFONZ Council and Secretariat wish all of the members of the Association a very happy Christmas and a prosperous 2009.
KiwiSaver under a National-led Government
The National-led government introduced the Taxation (Urgent Measures and Annual Rates) Bill into Parliament on 9 December 2008. It was passed by Parliament without amendment and royal assent was granted on 15 December 2008. As expected the Act makes a number of significant changes to KiwiSaver.
These changes are set out below:
Contribution rate
The minimum contribution rate for employees is reduced to 2% of gross wages from 1 April 2009. Existing KiwiSavers and complying superannuation fund members will be able to retain their current contribution rate unless they elect to reduce their contributions to the new rate. From 1 April 2009 the default rate for new members will be 2%. In line with this the new minimum matching contribution rate for employers will also be pegged at 2% from 1 April 2009 and will no longer rise progressively to 4%. As a consequence the, transitional rules that allowed employees to make contributions at reduced rates until 31 March 2011 will also cease to apply from 1 April 2009.
Employer tax credit
The employer tax credit (currently up to $1,043 per KiwiSaver employee) will be discontinued from 1 April 2009, in exchange for the minimum employer contribution being pegged at 2% of gross salary from that date. In the short term employers will bear the full cost of removing the tax credit, as reducing the employer minimum contribution to 2% will only impact over time. This may be passed on to employees over the longer term through lower wage increases, but in some cases the discontinuation of the employer tax credit will mean employers face a real increase in remuneration costs. This will particularly be the case for employers who agreed to contribute above the statutory minimum in reliance upon the tax credit defraying some of the cost. Issues may arise under employment law around the extent to which those arrangements are now able to be altered.
Full member tax credit
The full member tax credit will continue to be calculated on the level of contribution paid by the member up to the existing maximum of $1,040. This means there is flexibility for those earning less than $52,000 a year to contribute at more than the 2% minimum rate or make additional lump sum contributions if they wish to maximise the credit available. It also means that non-employee KiwiSavers will be able to continue to contribute the amount required to maximise the credit.
Employer Superannuation Contribution Tax exemption
The Employer Superannuation Contribution Tax (ESCT) exemption for KiwiSaver and complying superannuation funds will reduce from 4% to 2% from 1 April 2009. Leaving the exemption on matching employer contributions up to 4% of gross salary would have left in place a significant incentive for employees to contribute at greater than 2% if their employer agreed to match their additional savings up to 4%. It will also expose employers who contribute between 2 and 4% to ESCT for the first time, introducing further compliance costs, and acting as a real disincentive to contribute beyond the statutory minimum.
Fee subsidy
The $40 per annum fee subsidy will be discontinued from 1 April 2009. This will impact adversely on members who are taking contribution holidays and who are therefore not receiving the member tax credit. Those with small amounts in a KiwiSaver scheme could see their savings being eaten away by fees at a greater rate than would otherwise have been the case.
September employment law changes
The ill-considered employment law changes relating to KiwiSaver contributions that were rushed through Parliament in September this year have been repealed. We talk about this in more detail below.
Transitional provisions
Transitional provisions will apply to protect schemes from non-compliance with securities legislation, but only until 14 February 2009 and only to the extent that the non-compliance arises by virtue of the passing of the Act.
The limited transitional relief period means that schemes will need to urgently review all disclosure documentation in the New Year to ensure that any changes required, as a result of the Act, are in place by that date.
Variations to prospectuses and investment statements will be required. In the case of existing investment statements it will be possible, until 30 June 2009, to use an insert if certain requirements are met. This allowance may defray some printing costs, but care will need to be taken to ensure the investment statement does not become misleading as a result. Regardless, scheme specific communications to existing members will be required, in addition to the proposed Government communication strategy.
Employers and the trustees of complying superannuation funds will need to urgently review employment contracts and trust deeds (as applicable) to see whether any changes are required. In the case of those employers who have agreed to contribute above the minimum compulsory level, remuneration strategies may need to be revisited as a result. However, the ability to reduce employer contributions for existing KiwiSaver and complying fund members, where employees elect to reduce their contributions to 2%, may be limited.
Whilst the rapid pace at which changes relating to KiwiSaver and complying superannuation funds are pushed through Parliament are frustrating, scheme providers and employers need to act now to meet the tight transitional timeframes.
Total remuneration’s timely re-acquaintance with KiwiSaver
The ‘total remuneration’ debate, which has been a tinderbox for employers and had become a key election issue for the National Party, was concluded with the passing of the Employment Relations Amendment Act 2008. The effect of the employer’s compulsory contribution pursuant to the KiwiSaver Act 2006 has, since its inception, been plagued by uncertainty and frequent revision. Numerous legislative changes have rattled employers and left them wondering where their legal rights lay. This was especially so where Labour’s September amendment to the Employment Relations Act (‘ERA’) is concerned.
With the passage of the Taxation (Urgent Measures and Annual Rates) Bill on 11 December 2008, the new government has given the green light to an employer’s use of ‘total remuneration’ arrangements. ‘Total remuneration’ describes the situation where an employee’s total salary or wages package includes the contribution that their employer is required to make to KiwiSaver. This amendment to the KiwiSaver Act, which will take effect from 1 April 2009, will ensure that all employment agreements that include ‘total remuneration’ arrangements entered into on or after 13 December 2007 will be lawful.
Originally, when compulsory employer contributions were incorporated into the KiwiSaver Act pursuant to s 101B, it appeared that Government intended that compulsory employer contributions be paid in addition to an employee’s gross weekly salary or wage. However, there was some ambiguity in the legislation, which led to different interpretations.
Consequently, the Labour Government amended the KiwiSaver Act to expressly allow employers to adopt ‘total remuneration’ arrangements. From 13 December 2007 employers were able to disregard the requirement of paying compulsory contributions in addition to an employee’s gross salary or wages. As a caveat, however, employment agreements had to contain contractual terms and conditions that specified that an employee’s gross wages or salary were inclusive of the employer’s compulsory contributions. ‘Total remuneration’ was permissible.
In September 2008 the Labour Government introduced an amendment to the ERA (The Breaks, Infant Feeding and Other Matters Amendment). This amendment allowed an employee to raise a personal grievance against their employer in the ‘total remuneration’ context. An aggrieved employee had to show that their employment had been adversely affected, in whole or in part, because they were a member of a KiwiSaver scheme (or a complying Superannuation fund) and needed to illustrate that his or her wages or salary were less than that of a comparative employee (non-KiwiSaver or non-Superannuation employee). In essence, the ability to contract out of the requirement to pay employer contributions (in addition to an employee’s gross wages or salary) was stripped of its practical value. The Labour Government had ensured that the
‘total remuneration’ avenue was road-blocked.
The new amendment to s 101B illustrates that the National Government will permit ‘total remuneration’. However, the changes that have been made to the KiwiSaver Act specify that employers will only be allowed to do so if they expressly account for the amount of compulsory contributions that they are required to pay. Where an employment agreement does not specify the amount of compulsory contributions that will be extracted from an employee’s gross salary or wages, the total remuneration option will not be available. (Currently, employers are required to contribute 1% of an employee’s gross salary or wages, with this figure rising to 2% on 1 April 2009, but not increasing beyond this level). National believes that permitting ‘total remuneration’ will ensure that employers more readily comply with their
obligation to pay compulsory contributions. Employers will need to continue to negotiate ‘total remuneration’ arrangements with employees in good faith.
The amendment to the KiwiSaver Act was supplemented by the Employment Relations Amendment Act 2008. This repealed the current section 110A of the ERA, which empowered employees to bring a personal grievance where a ‘total remuneration’ scheme was resorted to by their employer. Also, section 101B(5) of the KiwiSaver Act was repealed. This removed any reference of an employee’s ability to raise a personal grievance on the basis of a ‘total remuneration’ arrangement from the KiwiSaver Act. Employers will now be able to offer ‘total remuneration’ without agonising over an employee’s ability to raise a personal grievance.
The changes to the KiwiSaver Act and the changes to the ERA compliment one another. The re-introduction of ‘total remuneration’ gives employers financial certainty and will ensure that employees start from a level playing field. One key reason for the Labour Government’s hesitance towards ‘total remuneration’ was their belief that ‘total remuneration’ gave employers a windfall in the form of the employer tax credit (which complemented the employer’s compulsory contributions). The current Government has allayed these fears by discontinuing the employer tax credit from 1 April 2009.
We would like to acknowledge the assistance of Kensington Swan in drafting the above articles.
Put these dates in your 2009 diary NOW!
The first of the ASFONZ 2009 Breakfast series will kick-off in February 2009.
Wellington – Wednesday, 11 February 2009
Auckland – Thursday, 12 February 2009
We are currently in discussions with the keynote speaker, and we will announce early in the new year who this is and what the topic will be.
Meanwhile, put these dates in your diary now.
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