The Government will shortly be finalising a number of changes to KiwiSaver. KiwiSaver has now been operating in New Zealand for over 12 years and is becoming an increasingly important feature of the New Zealand market. While the changes introduced do not reflect a significant change in the overall KiwiSaver framework, they do support the general trend of KiwiSaver becoming an increasingly flexible vehicle for savings and personal wealth planning, as well as for retirement. We expect further refinements to KiwiSaver over time and see a number of trends emerging including KiwiSaver providers considering how KiwiSaver funds can be better invested, for example in private equity or in infrastructure.
The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill (Bill) has been reported back from the Finance and Expenditure Select Committee (Select Committee). Among other things, this taxation omnibus bill seeks to simplify and modernise the Government’s social policy administration with implications for KiwiSaver. There are also changes to the Prescribed Investor Rates (PIR), and the employee share schemes rules. A summary of the most significant changes in the Bill are below.
Amendments to the KiwiSaver Act 2006
New withdrawal category for members with life-shortening congenital conditions
- Following the introduction of the Bill, a subsequent Supplementary Order Paper (SOP) was introduced proposing further changes to the KiwiSaver Act 2006 to create a new withdrawal category for members with life-shortening congenital conditions. The Select Committee recommended that the SOP be incorporated into the Bill (with some minor adjustments). The amendments would allow qualifying members to withdraw their savings before they reach the age of 65 and therefore allow those members to spend a portion of their adult life in retirement.
- While the draft Regulations have not yet been released, members will automatically qualify for withdrawal if they have a condition named in the Regulations, and members that have a condition not named in the Regulations will be able to apply to their KiwiSaver for withdrawal under an alternative process. Members who elect to make a congenital condition withdrawal will not be prevented from continuing in paid employment, Crown contributions and compulsory employer contributions will cease.
- Should the amendments be passed, questions may arise in future as to whether there should be further amendments to the KiwiSaver Act 2006 to reflect the treatment of KiwiSaver members with non-congenital life-shortening conditions.
Widening the Commissioner’s power to put investors in their correct Prescribed Investor Rate (PIR)
- The Bill proposes that the Commissioner will be able to notify a KiwiSaver provider of a multi-rate portfolio investment entity (PIE) of the tax rate to apply for an investor in that PIE where the investor's PIR rate is incorrect, irrespective of whether the investor has advised a different PIR or been defaulted to the top 28% rate. The Select Committee report notes the National Party’s minority view on refundability of overpaid PIE tax. It notes that 950,000 people were on the wrong PIR in the 2018/2019 tax year, resulting in an overpayment of $42 million dollars. The Government is proposing to address this issue by making refunds effective in the 2020/2021 tax year. The National Party’s view is that refunds should apply for the 2018/2019 year onwards.
Updating the KiwiSaver rules to reflect the payday reporting rules
- The updated KiwiSaver rules will allow the Inland Revenue to pay employer contributions to a member’s KiwiSaver provider based on employment income information it holds, and in advance of the employer paying the contribution to Inland Revenue. In addition, it is proposed that interest on both employer and employee contributions begins to accrue from payday, until the contributions are forwarded to the KiwiSaver provider.
There are also a number of other technical amendments to the KiwiSaver rules, including:
- Reducing the maximum period within which a KiwiSaver provider has to send information and funds to a new scheme provider when a member transfers schemes, from 35 working days to 10 working days.
- Reducing the KiwiSaver provisional period (during which individuals who are automatically enrolled in KiwiSaver are provisionally allocated to a default KiwiSaver scheme) and initial holding period from three to two months. This is to allow KiwiSaver providers to engage with a member about their investment options earlier. It would also mean a member’s initial contributions would be invested by KiwiSaver providers sooner.
- Requiring employers to provide Inland Revenue with income information for new employees and those who have just enrolled in KiwiSaver.
- Allowing members to change their contribution rate through their KiwiSaver provider or Inland Revenue, in addition to their employer. The change would require Inland Revenue to pass on a member’s request to change their contribution rate to their employer and the employer would then need to action this. Due to the potential increase in compliance costs for employers, the Select Committee has recommended that this amendment not apply until 1 April 2022.
- As drafted, KiwiSaver providers will have until 31 January 2021 to make sure their product disclosure statements and Disclose register entries are compliant with the new legislation.
There are also a number of other changes to the Income Tax Act 2007 including:
Withholding obligations for custodial institutions
- The Select Committee recommended various amendments to the Income Tax Act 2007 to deal with the obligations of custodial institutions, including the requirement to report details of investment income to Inland Revenue and the requirement that investment income be taxed at source.
- The Select Committee commentary notes that there are cases where overseas investors invest in New Zealand listed companies through New Zealand custodians, they in turn deliver returns to an offshore custodian, who ultimately pass these on to an overseas investor. The changes would clarify the withholding rules for custodial institutions. They would also relax the reporting rules so that an overseas custodial institution would be treated as the end investor for investment income withholding and reporting purposes. This would mean that a New Zealand custodian would only need to report that a return had been made to a foreign custodian, and would not need to report the details of the end investor thus reducing the compliance associated with getting the correct withholding tax for foreign investors. Certain fields of reportable information which apply to all payers of investment income would be relaxed for custodial institutions. This would reduce the compliance burden on New Zealand custodians and should also make it easier to obtain a NZ Non-resident Withholding Tax refunds.
Employee share schemes and the definition of "market value"
- The Bill proposes that the definition of “market value” in the Income Tax Act 2007 for the purposes of an employee share scheme (ESS) be amended, including the addition of a 5-day "volume weighted average price" or an equivalent for listed shares, and other methods accepted by the Commissioner of Inland Revenue. This should make is easier for listed companies to value their shares, reducing compliance costs and improving accuracy of valuations. The proposed amendment would apply retrospectively from 29 September 2018 for the purposes of the general ESS rules. For exempt ESS rules, the proposed amendment would apply from 29 March 2018.
- The Bill is awaiting its Second Reading. All changes noted above are expected to come into force on 1 April 2020 unless otherwise stated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.