Updating a PIR and (further) KiwiSaver changes
Tax Alert - August 2019
By James Arbuthnott
Another round of proposed tweaks for KiwiSaver and PIRs was announced in late June. The changes are generally investor friendly, broadly to recognise that technology (including Inland Revenue’s systems) has advanced since KiwiSaver was introduced in 2007, and use the information available from payday filing. The proposals are intended to make the administration of KiwiSaver more efficient, and they reflect the fact that technology means some things should simply be done more quickly than the current rules require.
There has been plenty of recent discussion about PIE and KiwiSaver investors using the wrong prescribed investor rates (PIR). One issue for investors is that if the rate applied is too high (including a 28% default rate), the ‘overpaid’ tax is not refunded. Pleasingly, it is now proposed that, in addition to being able to tell a PIE to update an investor’s rate where they have selected the wrong one, the Commissioner can tell a PIE to update the rate if the investor is on the default rate. A good use of the data Inland Revenue now has more ready access to.
Despite this, investors still need to consider the rate being applied to avoid the pitfalls of it still being wrong, as discussed briefly in our June Tax Alert. It would also seem reasonable for Inland Revenue to consider a further amendment to allow investors with overpaid PIE tax to get a refund through their tax returns, particularly given the information Inland Revenue now has available and the highly automated tax return processes that now exist for many taxpayers.
On-payment of employer contributions
Under a proposed change, employer contributions will be paid by the Inland Revenue to scheme providers before the contribution is potentially received by Inland Revenue. Inland Revenue will pay the employer contributions as soon as practicable after the receipt of the employer payday report. This is likely to be before the date that the employer is obliged to pay the associated PAYE and contributions. This acknowledges that the employee should benefit as soon as practicable from having the funds invested in their chosen scheme. It also extends what is effectively a Government guarantee on a KiwiSaver member’s employee contributions to the related employer contributions. This introduces a degree of credit risk for the Government.
Currently, if you want to transfer to another KiwiSaver scheme, the old provider has up to 35 days to transfer the funds and information. This time-period will reduce to 10 working days, in essence recognising the fact that it simply shouldn’t take 35 days to carry out this task.
Changing a contribution rate
Further to the new 6% and 10% employee contribution rates, it is proposed that a member could change their employee contribution rate by notifying their scheme provider or Inland Revenue, rather than using the sole existing option of giving notice to their employer.
While it is suggested that this could improve the member / provider relationship, it does appear to risk introducing a further level of administration. That is, those parties will have to contact the employer, and the employer is likely to go back to the employee to verify the request before making the change, in any event.
PAYE and ESCT rates
Commentary to the proposals suggests that up to 63% of early adopters of payday filing are using incorrect employer superannuation contribution tax (ESCT) rates. That seems like an extraordinary number, although the ESCT rate bands and how the relevant amount is calculated do differ from the PAYE bands.
Given this, to better allow Inland Revenue to verify that the correct rate is being applied to KiwiSaver contributions, it is proposed that employers would provide Inland Revenue with information on any difference between an employee’s income for PAYE and KiwiSaver purposes, and information on the employee’s ESCT rate. While this could add compliance costs to employers, it should also reduce the risk of them incurring penalties due to miscalculations.
Under the KiwiSaver legislation, Inland Revenue must pay interest on contributions from the 15th of the month in which employee contributions are deducted from salary / wages or from the 1st of the month in which employer contributions are received by Inland Revenue, until the date on which the contribution is passed on to the provider. With payday filing giving Inland Revenue sufficient and more ‘real-time’ information, interest on employee and employee contributions can now be calculated with reference to a member’s payday. However, with the current interest rate on KiwiSaver contributions being 0.81% and the proposal to transfer employer contributions at an earlier date, this is unlikely to make a significant difference.
There are also a couple of proposals in relation to KiwiSaver enrolments. Firstly, the current three-month period during which an automatically enrolled member is provisionally allocated to a default provider and during which Inland Revenue holds onto any contributions will reduce to two months.
Secondly, a non-resident can currently enrol and then has three months to meet the residence requirement. This period will be removed – that is, a person not meeting the residence requirements will have their account closed immediately. Obviously they can still choose to become a KiwiSaver member when they do meet the requirements.