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Tweaking KiwiSaver could hurt savings

Budget 2011 focused on reducing expenditure and minimising revenue leakage.

It is light on tax but KiwiSaver was subject to changes.

KiwiSaver was a retirement-initiated incentive Scheme, subscribers to which should be New Zealand citizens or Permanent Residents, eligible for Superannuation (currently 65 years of age).

Every one joining the Scheme was entitled to a Government start-up of $1000. However, those above 18 years of age were entitled to annual tax credit up to $1042.86 and employer contributions matching 2% of earnings of the member.

Three years after the first contribution, members could use their savings (except the Government contribution of $1000) to buy their first home with a further subsidy from Housing New Zealand.

KiwiSaver was introduced when the New Zealand economy was under the debt and consumption driven economic bubble. More than $1 billion a year went into KiwiSaver accounts that came from Government subsidies and tax breaks. These contributions did not constitute real savings, as they were borrowed funds.

Everyone is today reminded that the Government borrows about $300 million a week to fund a number of schemes including KiwiSaver.

Three Changes

The Savings Working Group established by the Government in August 2010 recommended that reduction of borrowing was important to lift national savings.

Finding the Scheme unaffordable at the present juncture and due to changed Government priorities, Budget 2011 made changes to KiwiSaver. The Government decided to withdraw its financial support and push members and employers to contribute to the Scheme.

In essence, the Government announced three main changes:

1. The Government’s maximum matching contribution in Member Tax Credits will reduce from $1042 a year ($20 per week) to $521 a year ($10 per week) with effect for the tax year ending June 30, 2012. In order to get the $521 from the Government, a member must still contribute $1042. This change will not affect the Member Tax Credits payable for the tax year to June 30, 2011. As these payments are made annually after the fiscal year, the first payments at the new levels will occur in the second half of 2012.

2. The minimum employee and employer contribution rates will rise from 2% to 3% on April 1, 2013. This would apply to existing and new members. However, members can choose to remit 4% or 8%.

3. Employer contributions to KiwiSaver would not be tax free from April 1, 2012. Even the current Employer Superannuation Contribution Tax (ESCT) exemption for employer contributions up to a maximum of 2% of an employee’s gross salary will not be applicable from April 1, 2012.

Less attractive

These changes will make KiwiSaver less attractive. However, they will not alter the overall level of contributions.

The reduction in the Government subsidy would be offset by an increase in the contributions from employers and employees.

In spite of these changes, the KiwiSaver would still gives a person ( even under the age of 18), $1000 just for joining and for every dollar invested up to $1042 a year, the Government will invest $521.

The first home deposit subsidy of $5000 has been retained. The Government expects to reduce the net international liabilities (the amount owed to foreign lenders) by 2% of Gross Domestic Product over the next decade.

Vijay Talekar is Director of Tax Experts Limited, Chartered Accountants (www.taxeperts.co.nz), Level 1, 208 Great south Road, Papatoetoe, Auckland 2025. He can be contacted on (09) 2792987. The above article should be considered only as a guideline and not a specific advice. Mr Talekar absolves himself, along with the management and staff of Tax Experts Ltd and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.

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