Firm Journal

Introduction of new KiwiSaver Bill

The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill contains proposals to simplify and modernise the administration of KiwiSaver. The Bill proposes a number of changes to improve the administration of the KiwiSaver scheme, facilitating faster transfers of funds, improving the administrative efficiency and enhance members’ experience with the scheme.

The implementation of a new information technology project known as Business Transformation (BT) has allowed Inland Revenue (IRD) to detect more clearly what rate of tax that people should be paying on their KiwiSaver accounts and other investment savings.

Though the New Zealand tax system has a broad-base, low-rate framework, the IRD has identified that approximately 1.5 million people have been paying the wrong prescribed investor rate (PIR) on their KiwiSaver accounts and other managed funds.

Currently, KiwiSaver investors and others with savings in Portfolio Investment Entities must be the ones to notify savings providers of their appropriate PIR tax rate. As many individuals do not do this step, they are charged the default rate of 28%. The tax paid is final and any overpayment cannot be refunded.

The proposed law will allow for the IRD to notify the provider to correct the PIR from 1 April 2020. The IRD has also announced that from mid-July it will begin contacting taxpayers who are on the wrong rate.

Posted on 10 September '19, under super.

Changes to IRD interest rates

From 29 August 2019, the interest IRD charges when tax is unpaid or underpaid is increasing from 8.22% to 8.35%. This is often referred to as use of money interest (UOMI) AND applies to most tax obligations such as income tax, PAYE, FBT, withholding taxes and GST. The new rate comes as part of the Order in Council changes made on 1 July 2019.

Along with the use of money interest rates payable on underpayments of tax being increased, the rate of interest for overpayments of tax will decrease from 1.02% to 0.81%. Late payment penalties will also apply if a taxpayer does not pay on time. IRD late payment penalties work as such:

  • One per cent the day after payment was due.
  • An additional four per cent if the tax, including late payment penalties, is still outstanding after seven days.
  • A further one per cent every month after.

The last IRD interest rate change was in March 2017. The new rates are based on the floating first mortgage new customer housing rate and the 90-day bank bill rate. Both are determined by the market and can move independently of each other and the Official Cash Rate.

Taxpayers can be entitled to a deduction for their UOMI payments for the interest paid on underpayments of tax, provided the deduction is made in the year the UOMI is paid.

Posted on 3 September '19, under tax.

Use KiwiSaver to buy your first home

You may be entitled to the KiwiSaver HomeStart Grant after you have been contributing to your KiwiSaver for three years. The Grant is administered by Housing New Zealand which operates outside of KiwiSaver and will be paid to your solicitor.

What are the grants?
There are two HomeStart Grants. These are:

  • For purchasing an existing home, it is between $3,000 and $5,000 based on $1,000 each year of KiwiSaver membership.
  • For building or purchasing a new home or for purchasing land to build a home on, it is doubled to $2,000 per year of membership. This can be up to a maximum of $10,000 for five years of membership.

To be eligible for the HomeStart Grant, you must be a member of KiwiSaver, another complying superannuation fund or exempt employer scheme, be 18 years or older, and have not received a HomeStart Grant or a KiwiSaver withdrawal before. You must have contributed the minimum percentage of your income to a KiwiSaver scheme for at least three years, although they do not need to be consecutive. You must have a household income, before tax, of less than $85,000 per year for one person, or less than $130,000 per year for two or more people. You must have a deposit that is 10% or more of the purchase price, including the addition of the grant. You should note that income and house price caps will also apply.

In some circumstances, you may still be eligible for the HomeStart Grant if you’ve owned a house before. Housing New Zealand will need to determine if you are in the same financial position as a first home buyer. For further advice or information, consult your financial advisor.

Posted on 12 August '19, under super.

Simplifying provisional tax for small businesses

Inland Revenue is making provisional tax simpler for New Zealand small businesses through the Accounting Income Method (AIM). Now in its second year, AIM allows business owners to pay a tax bill only when they’re making a profit.

Under the previous rules of provisional tax, payments must be made three times a year and in equal amounts. As most businesses don’t earn their income equally across the year, this can cause strain on the business’s cash flow if taxes are paid earlier than profit is made.

AIM does not replace existing methods, but is available alongside previous ways of paying provisional tax. It is currently provided through three accounting software providers and aims to take the guesswork out of provisional tax by using a business’s real-time account information. This can then provide them with more certainty that they are paying the right amount of tax at the correct time. AIM also reduces a business’s exposure to penalties and interest on provisional tax.

AIM is currently provided as part of software accounting packages from MYOB, Reckon and Xero. To find out whether AIM will assist your business, speak with your accountant or tax agent.

Posted on 6 August '19, under tax.

Understanding KiwiSaver for employers and employees

KiwiSaver is New Zealand’s approach to a taxpayer-subsidised, personal retirement savings regime. Under the scheme, employers make payroll deductions for each employee through the Pay As You Earn (PAYE) tax system. Employees are required to save these to a KiwiSaver account. Here are some of the key features of KiwiSaver that employers and employees should be aware of.

KiwiSaver is eligible for anyone under the age 65 who is a New Zealand citizen. While people over age 65 cannot join, they can remain as members if they have joined before turning 65. They are also eligible if they are entitled to live in New Zealand indefinitely, and are normally living in New Zealand at the time they join.

Employee contributions:
Employees who are members of KiwiSaver must contribute a minimum of 3% of their gross taxable pay. Individuals can choose to increase the amount to 4%, 6%, 8% or 10%, but can reduce it back to the minimum amount of 3% at any time. Gross taxable pay includes all bonuses, holiday pay and overtime pay. It does not include things such as redundancy pay, accommodation benefits, taxable overseas living or accommodation allowances.

Employer contributions:
While employees must contribute to their own KiwiSaver savings, it is also compulsory for their employers to put money in. These KiwiSaver deductions must be at the default rate of 3% of their pay. However, an employer is not required to make compulsory contributions to an employee’s KiwiSaver if they are already paying into another registered eligible superannuation scheme, the employee is under 18 years or if they are over 65 years.

Posted on 15 July '19, under super.

What to know about the IRD’s new automatic tax assessments

From 20 May 2019, Inland Revenue has begun to automatically assess the 2019 tax position for over 380,000 tax-paying individuals. These assessments are a part of the IRD’s business transformation program, which aims to modernise and streamline the process of New Zealand’s tax system.

These new assessments will finalise the end-of-year information for the annual tax year ending 31 March 2019. Individuals that are affected will be those that have a reportable income only, such as salary or wages, interests or dividends, and NZ super. The end-of-year assessment uses employer and bank information to show you how much you’ve earned and how much tax you’ve paid, as well as providing you with a tax calculation. Individuals with a myIR account will be notified when their tax assessment is ready to view.

Upon receiving an automatic tax assessment, you should check it immediately as the IRD will need to be informed of any discrepancies or income that is not shown in the assessment. You will have until your terminal tax date to do this, which is 7 February 2020, or 7 April 2020 if you are using a tax agent.

No further action is needed for tax assessments that are correct, as the IRD will automatically pay any refund directly into your bank account within 48 hours of the assessment completion. In cases where tax is owed, Inland Revenue will confirm the amount that is owed and the due date. There will be a range of payment options available to individuals, including payment plans.

In cases where you have other sources of income, do your own tax return, or are self-employed, then you should not receive an automatic assessment and will still need to file your own income tax return. Consulting a tax advisor for further assistance may be helpful in these circumstances.

Posted on 8 July '19, under tax.

Why you should check your KiwiSaver tax rate

Inland Revenue has identified that 450,000 people have been paying the wrong rate of tax on their KiwiSaver accounts and other managed funds. This highlights the importance of understanding what rate of tax you should be paying on your KiwiSaver, and to check that you are paying the correct amount.

The implementation of a new automated tax system has allowed the IRD to detect more clearly what rate of tax that people should be paying on their KiwiSaver accounts and other investment savings. The IRD will be contacting those who have been paying the incorrect prescribed investor rate (PIR) on managed funds like KiwiSaver.

The PIR determines how much tax you pay on your portfolio investment entities (PIEs). Members and their employers both make contributions to KiwiSaver, before the fund manager then invests those both locally and overseas. Any returns are then taxed by the IRD. The prescribed guideline rates are 10.5% for those earning a taxable income of below $14,000, 17.5% for those earning between $14,000 and $48,000, and 28% for those earning over $48,000.

To avoid paying the wrong tax rate, members should work out their estimated income, which will then tell you what your PIR rate is likely to be. You may consider contacting your fund manager to further check the details of what tax rate you are paying and to inform them of your correct PIR, as your income earned from a fund may be taxed at the default rate of 28% without your knowledge.

For further information on taxable income, PIRs and to determine your correct PIR, you should consult your professional tax advisor.

Posted on 18 June '19, under super.

What businesses need to know about the new R&D Tax Incentive

The Taxation (Research and Development Tax Credits) Act 2019 has received the Royal Assent, and was passed into law on 7 May 2019. The R&D Tax Incentive will apply to eligible R&D activities conducted by businesses from the 2019/20 income year. Here is what eligible businesses need to know about the recent legislation.

The aim of the tax incentive is to raise New Zealand’s expenditure on research and development to 2% of GDP over the next 10 years. This is in the hope that it will create a more productive and sustainable economy. However, in order to reach this target, more businesses will need to increase their expenditure on R&D. The main features of the incentive are:

  • A credit rate of 15% applied against income tax liability.
  • A minimum expenditure threshold of $50,000 per year, with a $120 million cap.
  • Limited form of refunds for the first year of the scheme that is similar to the R&D tax-loss cash-out scheme run by IRD.

Core R&D activities are defined as having a material purpose of creating new knowledge or new and improved processes, or to resolve technological or scientific uncertainty.

For most businesses, expenditure on eligible R&D activities that are undertaken from 1 April 2019 will qualify for the tax incentive. These businesses will be eligible to transition into the new regime at the start of their 2019-20 income year and should start recording their R&D expenditure now to ensure that their records are ready to file.

Posted on 11 June '19, under tax.

Take advantage of government contribution to your KiwiSaver

To help you add savings into your KiwiSaver account, the Government will make an annual contribution of up to $521 to all contributing members over the age of 18. Over a KiwiSaver member’s working life, the government contribution could be worth as much as $36,000.

Check your eligibility:
The Government contribution stops when a member reaches the age of eligibility for NZ Super or has been a member for 5 years. If you’re an employee who earns at least $34,762 a year (before tax) and you contribute the minimum 3% into KiwiSaver, then your contributions will be at least $1043, the amount required to receive the full payment from the government. In this case, the full amount of $521 will automatically be paid into your account by late July or August.

See if you’ve contributed the correct amount:
Contractors, freelancers, part-time workers or those who earn less than $34,762 a year, will need to check how much has been contributed to their KiwiSaver account in the past year. There is still time to top your account to receive the full government contribution if you find that you come up short.

Top-up your KiwiSaver by mid-June:
The official deadline to top-up your KiwiSaver account is 30 June. However, many providers will prefer members to have a minimum amount of $1043 in their account by mid-June in order to process the government contribution efficiently. You could consider making arrangements to top-up your account either by automatic payments or a lump sum, as the government will match each dollar with 50 cents.

Posted on 20 May '19, under super.

Calculating your provisional tax

For business owners or those who are self-employed, your income tax is paid in several instalments instead of a lump sum at the end of the year. This is referred to as provisional tax.

Provisional tax must be paid for individuals who owed more than $2,500 of tax at the end of the year for their previous return. It is then payable in the following year after the individual tax return has been completed. The income that provisional taxpayers often earn includes self-employed income, rental income, overseas income, or income earned as a contractor or from a partnership.

Provisional tax payments are based on your business profits during a certain payment period. There are a number of ways to work out provisional tax. These include:

Standard option:
Calculated by either last year’s residual income tax + 5%, or your residual income from two years ago + 10%, the standard method is useful if your income is steady or will increase over the next year.

Estimation option:
When you know that your income will decrease over the next year, the estimation method is used. Add up all the taxable income that you expect to receive in the next year, then work out the tax on this amount and deduct any PAYE and other income tax credits you would be entitled to.

Using each of these methods to calculate provisional tax is followed by filing your return and commence making provisional payments through myIR.

Posted on 10 May '19, under tax.