Time to review your Employer Superannuation Contribution Tax rates
Tax Alert - May 2021
By Robyn Walker and Charlotte Monis
When it comes to payroll, everything should be simple right, what could possibly go wrong? The truth is that plenty can go wrong, and one aspect of payroll has recently hit the headlines as a tax which can cause large and costly errors over an extended period. The culprit? Employer superannuation contribution tax (ESCT).
What is ESCT?
ESCT is a tax which is deducted from employer contributions to employees’ KiwiSaver or other complying funds. The correct rate of ESCT to apply to each employee is based on the employee’s marginal tax rate. However, determining which rate will apply requires knowledge of an employee’s annual income. While this may seem simple, it’s not always the case. The ESCT rate is calculated based on the employee's “ESCT Rate Threshold Amount”, as set out in the following table:
ESCT Rate Threshold Amount
$0 - $16,800
$16,801 - $57,600
$57,601 - $84,000
$84,001 - $216,000
ESCT is applied at a flat rate based on the most appropriate rate for each employee. That ESCT rate is based on the ESCT Rate Threshold Amount, which is determined based on historical data or predicted information, depending on the length of service of a particular employee:
Option 1: If the employee was employed for the whole of the previous tax year; the total of prior year salary or wages, plus the gross amount of employer superannuation contributions (before deduction of ESCT) in the prior tax year.
Option 2: If option 1 doesn’t apply; the total amount of salary or wages that the employer estimates will be derived by the employee in the tax year the contribution is paid, plus the amount of gross employer superannuation contributions (before deduction of ESCT) that the employer estimates they will pay in the tax year.
Common ESCT mistakes you don’t want to make
Some common mistakes to avoid:
- Don’t set and forget. ESCT rates need to be reviewed annually. This is especially important for employees who need to move from the “option 2” to “option 1” methodology described above.
- Make reasonable estimates of earnings and superannuation contributions if you’ve got new employees.
- Sense check and do spot checks. While many employers use payroll software, many software packages don’t calculate ESCT rates correctly.
- Don’t forget former employees. If contributions are still made after an employment relationship has ended, ESCT still applies; but it applies at a flat rate of 39%.
- Don’t assume that you’ve got it right in the past. Until recently, Inland Revenue hasn’t had a computer system which could catch errors on a timely basis. Inland Revenue’s new computer system makes it easier to detect potential errors – they’ll start sending letters to employers from May 2021.
What to do if there is an error
Inland Revenue’s greater visibility of ESCT data now begs the question of what should be done if an error is identified? To correct a payment mainly depends on whether you paid too much or too little, and how the error occurred.
A) If you’ve paid Inland Revenue too little
When ESCT has been underpaid, the new ESCT figure is calculated using a gross-up formula. The net employers’ contribution to the superannuation scheme should not be adjusted, instead the resulting ESCT is corrected by applying the gross-up formula.
Delight Limited makes a 3% employer contribution to its employees’ KiwiSaver funds. Delight reviews its ESCT rates and discovers it has had two employees on the wrong ESCT rates
Delight was deducting ESCT from contributions to Kerry at a rate of 30% but should have been using 33%. Kerry’s gross earnings for the return is period was $4000.
The gross employer contribution is $4000 x 3% = $120.
ESCT on this at 30% would result in a net employer contribution of $84 and ESCT of $36.
Since the ESCT was underpaid, Delight would need to use the following to calculate the correct ESCT:
[(tax rate ÷ (1 − tax rate) × contribution to fund) − tax already paid]
= [(.33 / (1-.33) x $84) - $36] = $5.37
Delight would need to increase the ESCT amount from $36.00 to $41.37 without making any adjustments to the net employer contribution of $84 previously made to Kerry’s KiwiSaver provider.
B) If you’ve paid Inland Revenue too much
When ESCT has been over-deducted, effectively the over deduction can be calculated, and Inland Revenue can transfer the excess amount to the superannuation fund.
Delight was deducting ESCT from Duncan’s contributions at a rate of 33% but should have been using 17.5%. Duncan’s gross earnings for the return is period was $1500.
The gross employer contribution $1500 x 3% = $45
ESCT on this at 33% would result in a net employer contribution of $30.15 and $14.85 ESCT.
ESCT on this at 17.5% would result in a net employer contribution of $37.13 and $7.87 ESCT.
To correct this, the Delight should contact Inland Revenue and arrange to decrease the ESCT from $14.85 to $7.87 and increase the net employer contribution from $30.15 to $37.13.
Taxpayers should be undertaking regular reviews of taxes, including payroll related taxes. If it’s been some time since you last lifted the lid on employment taxes, now is the time to do it. Deloitte is very experienced in conducting employment tax reviews so don’t hesitate to get in touch with your usual Deloitte advisor for more information.
May 2021 Tax Alert contents
- Inland Revenue is watching your residential property transactions
- Research and development tax incentive – New guidance and deadlines, you might be back in the running for a 15% credit
- Loss carry back rules – is it too late to get the benefit?
- Data analytics - Inland Revenue loves it, how can you make it work for your business?
- Time to review your Employer Superannuation Contribution Tax rates
- Taxing Social Media
- Do you know who can sign your corporate tax return?
- Snapshot of recent developments