The good thing about KiwiSaver is that, with its launch, the true nature of this initiative is coming to the fore.
The not-so-good thing is that there are more than few devils in the detail. Not just in the administrative and fiduciary strain that it will put on employers and their businesses, but its potential for unforeseen consequences.
Taking stand against something as wholesome as retirement savings can put one in ‘no win’ situation – yet we are troubled by some anomalies that have appeared during the unveiling.
One area of particular concern for us is the mechanics of compulsory contributions by employers.
In the pursuit of not having their overhead burgeon out even more under the weight of KiwiSaver obligations, some employers may be thinking about downsizing their operation. This move could come back to haunt them. Under the post-Budget revelations, employers who struggle to pay KiwiSaver contributions may face ‘double whammy’ whereby they have to pay out extra on redundancy payments. The not-so-fine print states that for employees who are members of KiwiSaver, any redundancy payments will be subject to KiwiSaver contributions. These are to be paid by both the employee and, from 1 April 2008, the employer.
The situation is equally tricky for companies that may genuinely be experiencing trading difficulties and therefore need to cut costs. For these employers, their hands may be called either prematurely, or unexpectedly, by KiwiSaver. If they are thinking they may have to lay people off, but are still hoping to trade through their difficulties, they may rush through any redundancies prior to 1 April 2008 to avoid this additional cost.
Needless to say, the outcome is equally unfair on employees. The purpose of redundancy payment is to tide the worker over until they find new job. Having four percent disappear out of their redundancy payment by way of KiwiSaver employee contribution, it could be an unwelcome surprise at an already stressful time.
Equally, the ability for an employee to reduce their salary to fund employer contributions will also be withdrawn from 1 April 2008. Any thought of employer contributions being funded by employees deducting these from their wages will be nixed.
How an employer handles possible tax credits that have been linked to KiwiSaver will also be of interest.
Let’s say you’re South Island based manufacturing company. You employ 50 people at an average wage of $40,000. You make pre-tax profit of $1 million. The reduction in tax rate from 33 percent to 30 percent will save you $30,000 per year.
Let’s now say that 60 percent of your staff are KiwiSavers. From 2008, you must contribute one percent into each member’s scheme. This will cost you $12,000. However, through the Government’s largesse, you receive $12,000 tax credit which can directly fund these contributions.
By 2011 this rosy picture pales somewhat in that you must contribute four percent – at cost of $48,000. Again, the tax credit helps to pay the increase but is restricted to $1040 per employee since each earns over $26,000. If your profit was to halve, your entire tax cut would be used up to pay the compulsory contributions.
The same scenario for more affluent company makes for even worse reading. Let’s now say you’re the owner of an Auckland enterprise that employs 75 staff at an average wage of $80,000. You, like your South Island comrade, make pre-tax profit of $1 million. Equally, you get that same $30,000 savings.
With the same number of enrolled staff, crunching the numbers creates very different picture. From 2008 you pay one percent employer contributions of $36,000 which is just covered by the tax cuts.
From 2009, however, two percent contributions of $72,000 will need to be paid for out of the tax credit of $46,800 and tax cut of $25,200. By 2011 when the four percent obligation kicks in, contributions will be $144,000. The tax credit by this stage is capped at $46,800 meaning $100,000 needs to be found just to, in the KiwiSaver stakes, break even.
Granted anything new has its wrinkles, but this appears to be an issue that hasn’t been fully considered in the rush to get the revised KiwiSaver package in place. Maybe by sending out the SOS, we can encourage the Government and their officials to rectify this anomaly and problem sooner rather than later.
Equally, don’t sit back waiting for miracle to happen. Don’t necessarily rush to abandon ship but be prepared for some rough weather ahead.
Jo Doolan, tax director, and Aaron Quintal, tax principal, Ernst & Young.
