This article was published on 14 July 2007. Some information may be out of date.

Q&As

  • How the KiwiSaver tax credit is calculated, and details for self-employed people.
  • KiwiSaver and taxation, plus more for the self-employed

Plus: 30 talented readers will win copies of KiwiSaver book

WIN A BOOK

The Weekend Herald has 30 copies of my new $9.99 book, “KiwiSaver: How to make it work for you” to give to readers.

The material in the book was first published in three special KiwiSaver sections in the Herald in early June. Now it’s available in a compact form, with a comprehensive index.

To win a copy, write — in up to 40 words — why you should be a winner. Be passionate, peculiar, pithy, poetic, pathetic or just plain funny.

Email entries to [email protected] with “Herald giveaway” in the subject line, by Friday, July 27 2007. Include your name and address. Winning entries will be published, with names, in this column in August 2007.

QIn a recent column about KiwiSaver, you explained “you will receive both employer contributions and the Government’s tax credit. The latter will match your contributions, up to $1040 a year”.

Thus, if a KiwiSaver was to contribute say $1040 in the first year, at the end of that year he/she would have $1000 (kickstart) + $1040 (own contributions) + $1040 (Government matching own contributions) = $3080 + whatever fund earnings have accrued on this amount + credit on whatever tax you would have paid on your own contribution of $1040. Am I correct here?

I’m self-employed, turned 60 on 20 June 2007, thus should be one of the first persons to benefit from KiwiSaver.

Can my business also make the equivalent of the compulsory employer contribution on my behalf? I have the impression the answer is “no”, but does my business not then miss out on the Government reimbursement up to $1040 per person, per year?

AFirstly, an important point just recently clarified by the government that will affect everyone who didn’t get into KiwiSaver on or before July 1: You won’t get the full tax credit of up to $1040 in your first year.

Your credit will be proportionate to how much of the year from July 1 2007 to June 30 2008 that you are a member.

If you join on September 1 2007, for instance, you will get a maximum credit of three-quarters of $1040, which is $780. If you join on March 1 2008, the maximum credit will be one quarter of $1040, which is $260.

That doesn’t mean you need a steady flow of contributions. If you are a non-employee, you can put just a tiny contribution in when you first join, and the rest just before June 30 2008. Your eligibility for the tax credit will depend on the date you join.

The same will apply to those who join in later years. Unless you join on July 1 of any year, the tax credit in your year of joining will be proportionate to how much of the year you were a member.

Of course, once you have joined, you’ll get the full tax credit — matching your contributions up to $1040 — in every subsequent year.

Turning to the second paragraph in your question, the above means that the “$1040 (Government matching own contributions)” will depend on when you join.

Also, the sum should include employer contributions where relevant.

And you got a bit carried away when you added “credit on whatever tax you would have paid on your own contribution of $1040.” Delete that.

I can see where your thinking came from. The government’s input is called a tax credit. But it’s not. It’s a straight-forward gift, with no tax ramifications.

There are a couple of finer points, too:

  • The government says the tax credit maximum is actually $1042.86 a year. That’s what $20 a week amounts to in a non-leap year.

    But reading about KiwiSaver is complex enough without including numbers like that. And the extra $2.86 makes so little difference that I’m going to keep referring to $1040.

  • The tax credits are paid a bit late. At the end of each year ending June 30, providers will tell Inland Revenue how much each KiwiSaver has contributed during that year. Inland Revenue will then pay the tax credits some time after that.

    The department is non-committal about when, but I’m sure there’ll be pressure not to make it too much later.

On your question about your business contributing on your behalf, the answer isn’t necessarily “no”. But it’s a bit complicated.

You can do so only if you have formed a company that employs you, and all the salary you earn as an employee of that company is subject to PAYE tax.

If you are set up that way and you want to join KiwiSaver, you have to do so as an employee. That means you must contribute 4 or 8 per cent of your pay.

Assuming the proposed legislation is passed later this year — and is not subsequently changed by a new government — your company must also contribute an amount equal to 1 per cent of your pay from next April, rising to 4 per cent by April 2011.

Note that there is no SSCWT tax withheld from the employer contribution — unless it exceeds 4 per cent of your pay. So that’s a bonus.

As you say, the government will reimburse your company by an amount matching the employer contribution — up to $20 a week.

In the April 2008–2009 year, that will fully cover the company’s 1 per cent contribution unless it pays you more than $104,000 a year.

But as the company contribution rises each year, it’s less likely the reimbursement will fully cover it.

From 2011–12, when the company must contribute an amount equal to 4 per cent of your pay, the reimbursement will fully cover your pay only if you receive $26,000 or less. If, for example, you are paid $52,000, the reimbursement will cover half of the employer contribution.

For more on this, read on.

QThanks for such an informative discussion re KiwiSaver and the self-employed on National Radio recently.

It was easily the best media info I’ve heard/seen on the subject, and particularly on how business owners who work in their business might claim the employer contribution subsidy.

However, you might be interested in the advice we got from our accountant, which I understand is making the rounds of the profession:

The fishhook in paying yourself through the PAYE system is that there is a rule that says you cannot pay yourself through PAYE as well as via the shareholder salaries.

You have to be only one or the other, which in most cases loses the flexibility of being able to alter the shareholder income according to the income for the year.

Although this is a rule that’s been around for years, and the IRD have not enforced it, we suspect that with this KiwiSaver scheme coming in, the splitting of the income will become more of an issue (because how will you really work out the 4 per cent of the gross if you are getting both?).

I don’t know if you have any further info on how IRD might be handling this, but if it is a likely issue you might want to make self-employed people aware of it via your columns, etc.

I’d like to make one further point. The thing I really don’t like about KiwiSaver is that it is a major step back to the past as far as our tax system goes, whereby you have to look through all the fine print, use loopholes, and employ an accountant for more than just doing your accounts, just to make sure you aren’t paying too much tax.

One of the things I liked about the Labour government reforms in the ’80s was the simplification of the tax system. In my mind, KiwiSaver is a significant move away from that.

ALast point first: For most people, the taxation of KiwiSaver is simple.

Your KiwiSaver provider will ask you what your tax rate should be — giving you guidance on how to work that out, in much the same way as banks do with interest payments. It will then send the correct tax to Inland Revenue.

You don’t have to do any more, and you won’t have to fill out a tax return if you haven’t in the past.

If, however, you are self-employed and want to get fancy about making employer and employee contributions, it does get complicated.

Thanks for passing on your accountant’s advice. An Inland Revenue spokesman says the information is accurate.

“All the income that person earns as an employee has to be subject to PAYE deductions,” he says.

If you are thinking of forming a company to take advantage of KiwiSaver, note that there are many pros and cons to the move. It certainly complicates life. Don’t let the tail wag the dog. Talk through all the ramifications with an accountant or lawyer with expertise in this area.

QUICK KIWISAVER INFO

The huge number of questions coming in about KiwiSaver reveal that many people don’t yet understand the basics of the scheme. But I don’t want to keep repeating the basics because that will bore other readers.

To solve this, I’ve decided to list the rules and incentives on www.maryholm.com. Click on the KiwiSaver book page and scroll to the bottom. You might very well find the answer to your question there. [This page has been removed from the website. Visit kiwisaver.govt.nz for up-to-date information.]

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.