Sunday, October 12, 2008

The KiwiSaver Tax Credit mess

This is scary if it is true.
update this has been edited.

If National gets in, the maximum a person can get as an employer tax credit under KiwiSaver is 2 percent of their pay. So if you earn $50,000, its $1000, if you earn $10,000, its $200. But if you are a student in a part time job putting in your 2 percent, you won't get much. Better to save some money if you can, or get a loan and whack as much in as you can - say $900 - between the time you finish studying (and working that part time job) and the time you get another job. can also put in as much as you want and the Government matches it up to $1040. So put in $900 and you`ll get a Government contribution of $900 as a tax credit the same asyou would as if you were working.

But you`ll miss out on your employer tax credit. So if you state you are self employed for a few months, or have your partner employ you at an extremely good rate, like a lump sum of many thousands, you can put in double, half it as the employer contribution - paid from your joint account - and claim the credits back off the Government to put back in your own KiwiSaver scheme as contributions.

But then there will be problems. If you then get a $40,000 job and contribute 2 percent of your salary, the Government will make no contribution to your employer as you would have already maxed out on this subsidy - in fact based on that salary you would have 20 percent more than you would have got had you been employed on that salary right through. At least, that's the theory, but in practice what could happen if there are no checks on this, is that the Government will eventually make an overpayment of a tax credit to your employer and, when it finds out, someone will be expected to pay the IRD back to cancel out the overpaid employer credits.

But in many cases the IRD won't find out unless all providers declare contributions before the end of the KiwiSaver year -and if they don't, IRD will not know how much the tax credit should be until it does.Two major providers have still not sent their lists to Inland Revenue for the year ending last June.

But as Mary Holm points out, the KiwiSaver year is different to the financial year. The KiwiSaver year is July - June, but it is expected to assess tax credits based on financial years from April to March. But if you have recently started a job, your annual pay year is based from that start date.

But what say you then leave a job and enter a higher paying one - and accept their different KiwiSaver provider - not only will IRD have no idea what your tax credits should be if one of the providers does not advise IRD, but you probably won't either unless you keep a real close tab on your accounts. Its even worse if you are working two part time jobs with two different KiwiSaver providers. Should it be found that you will be overpaid, you won't get the employer contributions. But if an administrative error is made and your KiwiSaver account is overpaid, and you are owed a tax rebate at the end of the financial year as well, one could cancel the other out. If you have to pay, you`ll have a big debt.

Rather than saving, KiwiSaver could get you into debt. And if you are in sufficient debt, apparently you can cash your KiwiSaver contributions. You can then pay the IRD the overpaid employer contributions because the IRD will probably force you to do so rather than write it off due to inability to pay.

So, if you are in that situation, you won't save at much all. But at least you`ll get a decent tax cut. In 2011.




Blogger Steve Withers said...

Or maybe tax cuts have become a religion to some while they are actually a dumb idea.

Maybe National should not undermine future saving and leave Kiwisaver alone. They should try to find some other way to fund its tax cuts for higher earners.

Or better tax cuts. Cullen tried for years to get the partisan hounds baying for tax cuts to understand a rainy day would come.

Looks like he was right....and National was wrong all along.

I can't understand why anyone would vote for National. They pander to prejudice well enough, but where tings that REALLY matter are concerned.....they get it wrong far too often.

Remember National wanting to join the invasion of Iraq to get an FTA with the US? One HUGE example of how bad their judgment can be.

October 11, 2008 at 6:08 PM  
Anonymous Anonymous said...

"If National gets in, the maximum a person can get as an employer tax credit under KiwiSaver is 2 percent of their pay."

No, the MINIMUM is 2%, and the minimum personal contribution is also 2%. Big difference, this actually makes Kiwisaver more accessible, if slightly less lucrative for some, so you are likely to get more people joining the scheme. You could still contribute 4% or 8% just as at present, so the change is marginal. They are making the savings by removing the employer tax credit, which the employee never sees anyway so doesn't really affect your Kiwisaver account.

Not defending National's policies, I'm Family Party, but thought I better correct this!

October 16, 2008 at 11:55 AM  

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