KIWISAVER – ONE YEAR ON .
Given it is the first anniversary of the commencement of KiwiSaver and it is again in the media spotlight with the recently proposed law change it is appropriate to review your position.
For the Self Employed (not on PAYE)
Typically as self-employed you are not in the PAYE system. You may choose to change this as we will discuss below.
You can still join KiwiSaver but the benefits are not as great as they are for employees.
When you sign on to KiwiSaver you are entitled to the $1,000 Government kick start. And you get a $40 annual fee subsidy. However as self employed outside the PAYE system you do not get access to the ‘employers’ contribution (1 - 4%).
As self-employed you are able to choose the amount you wish to contribute (subject to the particular scheme criteria). You will receive a matching contribution from the Government, called a member tax credit, of up to approximately $20 per week. It would be prudent to put in sufficient contributions to get access to the full member tax credit. This would be at least $1,043, say rounded to $1,050 per annum. The member tax credit effectively doubles your money.
The member tax credit is initially paid pro rata in the year (July – June) you join. This means that even if your contributions are over $1,043 but you only joined KiwiSaver part way through a year, you will only receive the relevant proportion of the Governments $1,043 member tax credit.
This Government contribution has curiously been called a member tax credit. In reality this credit is paid into your KiwiSaver account directly and has nothing to do with your income tax return.
As self employed you are able to stop/not contribute as your contributions are voluntary, subject to the scheme criteria.
So by the end of your first year in KiwiSaver (assuming you join in July) your account balance would be $3,093 (assuming the fee subsidy matches the fees charged and no credits for fund earnings). This balance would have a net cash cost to you of $1,050.
In subsequent years your KiwiSaver account would increase by $2,093, with a net cash cost to you of $1,050.
For the Self Employed on PAYE
What applies where a shareholder of a company is on PAYE? This could be in combination with a partner who is not on PAYE (see above).
In this situation you are able to join KiwiSaver and receive the $1,000 kick start and the fee subsidy. As you are on PAYE your employer (your company) is also required to contribute 1% (rising to 4% by 1 April 2011). However your employer may voluntarily contribute up to 4 percent. This employer contribution is tax free to you. As mentioned above, this employer contribution is reimbursed by the Government up to $20 per week. And the balance of the contribution is tax deductible to the employer.
For example if you were on a $40,000 PAYE wage your 4% contribution would be $1,600. Additionally the Governments member tax credit is $1043. And your employer’s contribution of 4% is also $1,600, less your employer tax credit of $1,040 from Government. This gives a net cost to the company of $392 after tax.
So by the end of your first year in KiwiSaver (assume you join in July) your account balance would be $5,243 (assuming the fee subsidy matches the fees charged and no credit for fund earnings). This balance would have a net cash cost to you and your company of $1,992.
In subsequent years your KiwiSaver account would increase by $4,243, with a net cash cost to you and your company of $1,992 as above.
For the Employee (on PAYE)
When you sign on to KiwiSaver you are entitled to the $1,000 Government kick start.
Currently if you sign on you contribute 4 or 8 per cent of your gross wage per annum. At present your employer is compelled to contribute 1 per cent of your gross salary with this rising to 4 per cent on 1 April 2011. Of course your employer may contribute a higher per cent sooner than the compulsory dates.
Currently the employer gets reimbursed through the PAYE system for their contribution to your fund of up to $20 per week or $1,040 per annum.
You will receive the member tax credit from the Government of up to approximately $20 per week. And finally you will also receive the fee subsidy, again from the Government, of up to $40 per annum.
Contributions Holiday
After twelve months in KiwiSaver you are able to take a contributions holiday. This can be for a period up to five years, and can be renewed indefinitely once the holiday period is up. Even on a contributions holiday you are able to continue to make voluntary contributions. Typically you would pay in at least $21 per week as this then means you still are entitled to the full member tax credit from the Government.
On a contributions holiday, your employer is not required to make any contribution to your KiwiSaver account. However if you can convince your employer to contribute $1,040 for you as well, they get reimbursed by the Government through the PAYE system (employer tax credit discussed above). This effectively costs your employer nothing except administration time. In this circumstance this $1,040 contribution will be assessable income to you the employee. Essentially you ‘triple’ your contribution – less the tax.
Mortgage Diversion
A lesser known benefit of KiwiSaver is the ability to divert up to half of your own contributions to your mortgage after you have been a member of KiwiSaver for twelve months. This is of benefit for those who are concerned that their own four percent contribution is too high. You have to ensure that your KiwiSaver provider and your mortgage lender allow this. Additionally the mortgage must be on your own home and not on a rental property or other investment property.
To receive the maximum benefit from this feature, you need to ensure that your contributions after the diversion are still at least $1,043 each year. This ensures you remain entitled to the full member tax credit.
Final Point
It appears that KiwiSaver may become another ‘political football’ as we head towards the election. It is not clear what would happen given a change in Government. Either way, expect change.
The information provided above is of a general nature. Everyone’s circumstances are different. It could be that a minor change to your circumstances may result in a significant improvement to your entitlements. There are a number of other circumstances that a minority of you may find yourself in that we have not covered. Many details of the scheme have been omitted for comprehension sake. Do not act alone on the information provided please seek professional advice.
