Targets KiwiSaver and Working for Families

Facing a record $16.7 billion deficit for 2010/11, Finance Minister Bill English presented his third Budget designed to get the Government's books back in order within four years.

Unlike last year, the 2011 Budget does little more than tinker around the edges with respect to tax policy and has few surprises. As expected, changes to KiwiSaver, Working for Families and Student Loans take the hit in order to balance the books.

Working for Families

Working For Families (WFF) tax credits remain largely unchanged. There are some small adjustments with respect to abatement thresholds, which mean higher income earners will no longer be entitled to WFF, or will receive a smaller entitlement.

These changes are to take effect from 1 April 2012, with a four year transitional period until the changes are fully in force.

WHK's Head of Tax Principal Scott Mason, said people should be more concerned with the changes to the definition of "Family Scheme Income" for WFF purposes that commenced on 1 April 2011.

"The adjustments made to WFF will be very minor", he said.

KiwiSaver

The Government plans to reduce its contribution to KiwiSaver, to fund increased spending in the health and education sectors.

The KiwiSaver member tax credit will reduce from $1 to 50 cents for every $1 contributed by members, with the maximum contribution falling to $521 per year. The minimum employee and employer contribution rates will increase from 2% to 3% from 1 April 2013.

Perhaps the most significant change to KiwiSaver is the removal of the existing exemption from Employer Superannuation Contribution Tax (ESCT) with respect to the compulsory 2% employer contribution. Currently, the ESCT applies to employer contributions above 2%, but from 1 April 2012, will apply to all employer contributions. As such, all contributions made to KiwiSaver after 1 April 2012 will effectively be from tax paid income.

At present, ESCT is calculated at a flat rate of 33% on any contributions made over and above the 2% compulsory employer contribution. From 1 April 2012, ESCT will be calculated based on an employee's prior year earnings, including the employer's superannuation contribution, or an estimate of what that amount would be if the person was not employed

The changes to the application of ESCT effectively mean that the employee, via the employer's compulsory contribution, is funding some if not all of the member tax credit that the employee will receive.

The table below sets-out the impact of these changes for someone earning $50,000.

The weekly contribution increases from $19.18 to $28.77 from 1 April 2013.

The $1,000 Government kick start remains unchanged.

How it affects you

Other than the change to the member tax credit, which comes into play almost immediately, all of the other changes are either 9 or 21 months away.

As such, the decision to join KiwiSaver remains largely unchanged following the Budget announcements as the advantages of joining largely remain.

Student Loan Scheme

Measures to crack down on abusers of the student loan scheme were announced in the Budget. The most significant change is the repayment holiday for overseas based borrowers will be shortened from 3 years to 1 year, they will need to complete an application process and provide a New Zealand based contact person before going overseas. The repayment thresholds for student loans will not be adjusted for inflation until 1 April 2015, effectively meaning that as wages rise in line with inflation, student loan repayments will increase instead of remaining static. Eligibility to receive student loans has been tightened for those with overdue repayment obligations in excess of $500, and restricts borrowing for those aged over 55 to tuition fees only.

Other Government Announcements

The Government also announced a review of the livestock valuation rules. In particular the elections allowing the movement between the two common valuation methods where tax advantages can sometimes be achieved.

The Government also aims to review the tax treatment of mixed use assets where those assets are used for both private and business purposes. This is in line with recent changes to the GST Act in relation to mixed use assets.

For more information, please contact the WHK office in your region - click here

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WHK article published in the Queenstown Mountain Scene

Disclaimer: The information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. You should not act upon such information without appropriate professional advice after a thorough examination of your particular situation.