With only six weeks till the 2012 Budget announcement, anticipation is high. What will the major issues addressed this year be? We don’t know a lot yet – except that the Government’s overriding goal is to return to surplus by 2014-15.

Last year’s budget proved that the Government is serious about reducing its spending. A number of changes – some of which have only just come into effect at the beginning of April 2012 – have been introduced to achieve this. We can expect more changes of this nature which, once again, will affect many New Zealand employees and employers.

Of the recently implemented changes, the most notable were those made to the KiwiSaver scheme. Employer contributions to KiwiSaver which, until now, have enjoyed an exemption from tax, will no longer have this immunity. The Government has removed the exemption that was introduced as part of KiwiSaver, which now means that the employer’s minimum 2% contribution of an employee’s gross pay will now be taxed. The Government is also cutting down its contribution to KiwiSaver from $1 for $1, up to $1,042 per annum, to $0.50c for $1, up to a maximum of $521.

The Government introduced these changes in a bid to be more fiscally responsible. With the economy still looking uncertain and the goal of returning to surplus by 2014-15 looming, a significant decrease in expenditure is necessary. Across the board, purse strings have been tightened considerably.

While these changes have been good for the Government’s balance sheet, they haven’t been so positive for the employee or the employer. Employees will now have less money going into their KiwiSaver account each week. And employers have been burdened with the extra administrative task and compliance cost of calculating and paying ESCT, on top of the existing ACC, PAYE, employer KiwiSaver, employee KiwiSaver, student loans and child support deductions.

The response to these changes was somewhat muted – especially from employees. My assumption is that many people haven’t even noticed the changes – stemming from the fact so many New Zealanders appear to be apathetic about their KiwiSaver scheme. A lot of people are only enrolled in KiwiSaver because they were automatically signed up when they started a new job. Many employees don’t actively follow the progress of their KiwiSaver account – and this apathy is what the Government was banking on when it made  these behind-the-scene changes.

So what will the effects of these changes be on the KiwiSaver scheme? The tax break on employers’ contributions was initiated as an incentive to get people on board with the scheme and was one of the key reasons for its success. So far, almost 1.9 million people are enrolled in KiwiSaver. It’s unlikely that these changes will put off more employees from opting into the scheme in the future: employees will still receive the $1,000 kick start and, while the Government has reduced their contribution, anyone enrolled in KiwiSaver still receives an extra $521 they wouldn’t receive otherwise. The Government wants people to save for their retirement; they are just less willing to contribute as much to our savings.

The next known change to the KiwiSaver scheme is that the minimum employer contribution will rise to 3%, effective 1 April 2013. Are further changes likely? The upcoming Budget will no doubt be formed around the return to surplus target. With this increased pressure to save money, who knows what other elements of the KiwiSaver scheme may be at  risk.

Other changes from last year’s budget that came into effect on 1 April 2012 included changes to ACC rates, Working for Families and student loans:

ACC

  • The earners’ levy is now set at  $1.70 (GST inclusive), down from $2.04 the previous year
  • The minimum liable earnings for self-employed workers has increased from $26,520 to $27,040
  • The maximum liable earnings has increased for:
    • self-employed people under the Work and Earners’ Account from $110,018 to $111,669          
    • employees, private domestic workers and earners other than self-employed under the Work and Earners’ Account from $111,669 to $113,768
    • employees and private domestic workers for calculating the residual portion of the Work Account from $110,018 to $111,669

Working for Families

  • The abatement rate will increase by 1.25 cents at every inflation adjustment round from 1 April 2012 until it reaches 25 cents in the dollar
  • The current abatement threshold of $36,827 has also been decreased by $477 to $36,350 (and will continue to reduce by $450 at subsequent inflation adjustment rounds until it reaches $35,000)

Student loan

  • New student loan repayment codes have been introduced and require employees to add “SL” to tax codes unless they are exempt
  • Those repaying student loans will no longer be able to use a special tax code to change the amount of  student loan repayment deductions from salary or wages. However there are some exceptions to this including:
    • Student loan special deduction rates for secondary income
    • Student loan repayment deduction exemption for full-time students
    • Making extra repayments through salary or wages
  • Employers may also need to use the new student loan repayment codes for extra deductions made on salary or wages:
    • SLBOR - used to identify extra repayments made through employers           
    • SLCIR – used if significant under-deductions have been made and the employee is required to make catch-up deduction

Further enquiries, please contact:

Geordie  Hooft
Partner, Tax & Privately Held Business
T +64 (0)3 379 9580
M +64 (0)21 670 330
E geordie.hooft@nz.gt.com