Cryptocurrency – A Potential Alternative Investment Option For Your KiwiSaver?

Digital cryptocurrency could be an investment option to consider for your KiwiSaver fund in the future if NZ Funds Management’s new approach to investing super pays off. 

As it stands, KiwiSaver isn’t a saving’s account – it’s an investment of your money on your behalf by your KiwiSaver provider. Each provider may have a different selection of investment options that they choose to invest in, but each fund type has its own specific asset types it traditionally invests in. 

With investments like gold, stocks and bonds, and property included in many KiwiSaver funds, the popular cryptocurrency Bitcoin is considered to be a commodity on par with gold when it comes to investing. It has the potential to become a way to diversify your investment portfolios, much like how current funds invest into various growth assets to boost their returns.

Bitcoin as an asset for investment currently contains 5% of NZ Fund’s KiwiSaver Growth Strategy fund’s money. The fund began investing in the cryptocurrency back in October 2020, following in the footsteps of Australian super providers who had begun a similar investment option for its members in terms of cryptocurrency.

Currently, KiwiSaver funds focus primarily on investing in one of six categories:

• Defensive
• Conservative
• Balanced
• Growth
• Aggressive
• Life Stages

Speak with your KiwiSaver provider about ways to invest your money for the future in your fund.

Choosing a fund for your Kiwisaver

Individuals should regularly check whether their Kiwisaver fund is right for them and not shy away from switching funds to a more suitable one if they are not appropriate. 

The following points are what you should focus on when reviewing your fund:

• Is the fund suited to your situation – depending on which stage of life you are in, the fund that suits you or can provide you with the most benefit could change.
• Does it have reasonable fees – higher fees should correspond to higher returns, make sure you conduct research to identify the appropriate amount of fees.
• Will you receive good service and communication – In the case that you may need assistance, you should be able to easily contact your provider and acquire the support you need.
• How has your super performed – Review how your super fund has performed over the years. Don’t focus on just one year, look at how the fund has performed over time. If your fund has performed poorly, then look at how your potential other choices have performed. 

There are 5 Kiwisaver options available:

1. Defensive
2. Conservative
3. Balanced
4. Growth
5. Aggressive

Defensive has the lowest risk level, low volatility, low potential results, and the length of investment is only 1-3 years. With each level, these factors increase so that the aggressive option has the highest risk, high volatility, high potential results and the length of investment is as high as 13 years.

Provisional tax options

Provisional tax helps manage income tax payment. Rather than paying a lump sum at the end of the year, you are able to make repayments throughout the year. There are 4 main options available to work out provisional tax:

Standard

Based on your previous year’s residual income tax (RIT) plus 5%. This is particularly useful if your income is steady or increases over the following year. If you choose the standard option, then you will pay 3 instalments throughout the year. Individuals registered for GST (filing biannual GST returns) will only pay 2 instalments. You may also be required to pay more tax after filing your returns. 

This option is selected automatically unless you specifically choose otherwise. 

Estimation

This option helps you avoid overpaying and underpaying your tax. It may be an ideal option if you already pay provisional tax and:

• Your income will be decreasing over the next year
• You suffer a loss which could drastically offset your income
• Your income is set to increase a lot and your RIT will be more than $60,000 higher than how much the standard option has calculated
• You have shifted from untaxed income (i.e. self-employment) to wages or salary

You must choose the estimation option if you’re choosing to be a provisional taxpayer but did not pay provisional tax last year. 

Account income method (AIM)

This option is available to individuals and companies with a yearly turnover under $5 million. This option is suitable if:

• Your business has been growing 
• You are new to business
• You have experienced a decrease in income from last year and find it difficult to estimate your income
• Your income is seasonal or irregular
• It is difficult for you to forecast your income accurately
• You have or want to start using accounting software

You only have to pay provisional tax when your business earns a profit – if your payments have been made on time and in full then no use of money interest will be charged

Ratio

Ratio option allows you to match provisional tax payments with business cash flow. I.e. your provisional payments are based on a percentage of your GST-taxable supplies. 

This option is useful if your income is varied or seasonal and you will need to meet various to select this option. 

Growing your super fund

Your super is often the money you rely upon during your retirement. Therefore, if you feel that you have enough funds for day to day life, you may want to grow your super. There are many ways to do this: 

• Employee contributions: Contribute to your super through your pay, or discuss with a scheme provider
• Employer contributions: If you contribute to KiwiSaver then your employer must also do so. 
• Getting the KiwiSaver government contributions: The maximum amount the government will contribute is $521.43. However, to receive this you must contribute at least $1042.86 between 1 July and 30 June each year.
• Make payments directly to the KiwiSaver account: You can always make voluntary contributions directly to the KiwiSaver at any time. 
• The contributions made to the KiwiSaver are used to invest in investments of differing risk. These investments depend on what type of fund you choose and thus the growth of your fund. 

What are tax codes?

Tax codes assist your employer in calculating how much tax should be deducted from your pay, benefit or pension. 

It is important to calculate your code and inform your employer as failing to inform them will result in getting tax at the non-declaration rate of 45%. You should also be updating your employer if your tax code changes at any point. 

Your tax code is influenced by the following factors:

• Your main income
• Your secondary income
• Whether you have a student loan
• Whether you are receiving schedular payments
• Whether you are a casual agricultural worker
• Whether you are a recognised seasonal worker
• Whether you are helping with election day work

The government might change your code if they believe you are using the wrong one. This is to avoid excessive taxation or to prevent you from receiving a bill to pay remaining taxes at the end of the year. You are able to inquire about why changes were made if you disagree. 

Withdrawing from your KiwiSaver

The KiwiSaver scheme allows you to voluntarily save up so that when you retire, you are financially secure. However, situations can arise during which you find yourself needing the support of your KiwiSaver before retirement. 

If you find yourself in one of the following situations, you are permitted to withdraw money from the KiwiSaver:

• Permanent emigration: If you have lived in another country for more than 12 months, then you can complete a permanent emigration withdrawal form which allows you to either withdraw your savings or transfer them to an approved superannuation scheme. There are some further considerations if you have emigrated to Australia.
• Serious illness withdrawal: If you experience a serious injury, illness or disability, and you are unable to part-take in work which is relevant to your experience and education, then you may withdraw money from your KiwiSaver
• Significant financial hardship withdrawal: If you are experiencing financial hardship, then you may be able to withdraw from your KiwiSaver once you finish a hardship withdrawal form. But, there are some eligibility requirements that you need to meet which are listed on the KiwiSaver website.
• First home withdrawal: As long as you meet certain eligibility requirements, you are permitted to withdraw funds from your KiwiSaver when buying your first home. 

These provisions allow you to access your KiwiSaver prior to retirement when you might need them the most. 

Paying taxes when self-employed

Self-employed individuals have to carry out all aspects of their business on their own. This includes anyone who owns a small business, works as a sole trader, or provides contracting services. In most cases, individuals are able to start a business without setting up any legal provisions. 

If you are self-employed, you can use your individual IRD number to pay tax. The amount of tax you pay will depend on the net profit of your business and you can pay by filling out an individual income return. Once you start making $60,000 you need to register for GST. 

Due to COVID-19, there have been a lot of financial difficulties and uncertainties that individuals and businesses have experienced. Therefore, the government has created subsidies which may assist individuals through this period. It may be worth looking into these provisions as the tax requirements might have changed some of the usual processes.

Changing your KiwiSaver contribution rate

Employees need to discuss changing their contribution rate with their employer, or alternatively, fill out the required forms if they are self-employed. 

The default contribution rate is 3% of an individual’s pay, but employees can change to either of the following rates:  3%, 4%, 6%, 8%, or 10%. Although the contribution rate may only be changed every 3 months, if employees wish to change the rate prior to the end of the 3 months, then they should alert their employer of this in writing. Further, although the maximum rate is 10%, if employees want to exceed this rate, then they should make a direct payment to their scheme provider. 

If the individual is not an employee, then the details of their contributions will be set out in the contract with their KiwiSaver provider. For example, if they are: self-employed, a contractor, not working, receiving a benefit then, there may be a minimum annual sum or specific payment periods that apply (e.g. monthly, quarterly). Therefore reducing or increasing contributions may need to be discussed with KiwiSaver providers. 

Types of individual expenses

There are several sorts of expenses that can be claimed during the end of year tax return. These include: 

• The cost of an accountant or tax agent to file and complete tax returns.
• Cost of income protection insurance if the insurance payout would be taxable. Talk to your insurance provider about whether your income protection insurance is deductible. If you are planning to get income protection, then you should consider opting for a deductible one.
• Any commission you were charged on your income from interest and dividends (other than bank fees) can be claimed.
• If you have borrowed money to buy shares or to invest, any interest on it can be claimed as long as the investment will produce taxable income. 
• If you paid interest due to late payment of tax to Inland Revenue, you will also be able to claim this, as long as it’s in the income year you paid it. 

You should remember that for these claims, you will be required to provide proof. This could include invoices from accountants or receipts for income protection insurance. Remember that if you receive an automatic income tax assessment, you should contact Inland Revenue to add these expenses. 

Withdrawing from KiwiSaver funds for significant financial hardship

Individuals may choose to apply to withdraw money from their fund if they are suffering significant financial hardship. 

To qualify as suffering significant financial hardship, one or more of the following criteria needs to be met as per the official government website:

• Cannot meet minimum living expenses
• Cannot pay the mortgage on the home you live in, and your mortgage provider is seeking to enforce the mortgage
• Need to modify your home to meet your special needs or those of a dependent family member
• Need to pay for medical treatment for yourself or a dependent family member
• Have a serious illness
• Need to pay funeral costs of a dependent family member

Before you withdraw money from the account, it might be worth considering if stopping kiwisaver deductions is a better alternative. This might provide some temporary relief by reducing expenses. The criteria for suspending contributions is different depending on the length of time you have been making contributions. 

• A year or more: Suspend contributions for 3 months to 1 year without needed to provide a reason
• Less than a year: Apply for suspension and provide reasons (one of which may be financial hardship)