What is “ESCT” and why do employers have to know about it?
Employer Superannuation Contribution Tax (ESCT) is currently under the spotlight as a result of the recent KiwiSaver changes announced in Budget 2011. The tax free status of employer contributions to KiwiSaver schemes and complying superannuation funds will end with effect from 1 April 2012. From this date employers will need to calculate ESCT on all employer cash contributions to superannuation funds.
Some employers will already be deducting ESCT either because they have their own superannuation fund which didn’t qualify for the exemption or they have been making KiwiSaver employer contributions in excess of the 2% minimum contribution. However for some employers ESCT may be a new tax to deal with.
The background to ESCT
As alluded to above, ESCT is not a new tax; in fact it has been in existence since 1 April 1989, when it was first introduced as the “specified superannuation contribution withholding tax”, or SSCWT. The government of the time had initially made a decision to subject certain employer superannuation contributions to FBT but replaced this treatment with SSCWT as a result of a review by the Consultative Committee on the Tax Treatment of Superannuation in 1988. It has been called ESCT since 1 April 2008 when the rewritten Income Tax Act 2007 changed the terminology.
With the introduction of KiwiSaver in 2007, employer contributions to KiwiSaver schemes (and certain complying superannuation funds which are broadly similar to KiwiSaver schemes) became exempt from ESCT essentially capped to the minimum compulsory employer contribution. The rules underwent several changes around this time but ultimately this exemption was capped at 2% when the newly elected National Government dropped the compulsory employer contribution from 4% to 2% from 1 April 2009. Since then, the first 2% of employer contributions to KiwiSaver schemes and complying superannuation funds have been exempt from ESCT.
Budget 2011 announced that the ESCT exemption for employer contributions to KiwiSaver schemes and complying superannuation funds will end. These changes have already been enacted. From 1 April 2012 employers will need to calculate ESCT on all employer cash contributions to all superannuation funds (including KiwiSaver schemes). There will be some employers who will be paying ESCT for the first time.
Until now there have been two options for choosing the rate at which ESCT is deducted. There has been an option to simply use a 33% rate or choose to use a rate which is based on the marginal tax rate of the employee. From 1 April 2012, the option to use the 33% rate is removed. Instead the rate is effectively the employee’s marginal rate which is determined from the following schedule:
|“ESCT rate threshold amount”||Tax rate|
|$16,801 - $57,600||.175|
|$57,601 - $84,000||.300|
The “ESCT rate threshold amount” is the gross salary or wages plus the superannuation contribution (before deduction of any ESCT) paid by the employer during the last tax year (i.e. 1 April to 31 March). If employees have not worked a full year, then the employer estimates what this would be for the current year.
Example calculation of ESCT
Say, employee A’s gross salary for the 2012 tax year (1 April 2011 – 31 March 2012) is $60,000.
Employee A belongs to KiwiSaver, therefore A’s employer compulsorily contributed the 2% minimum during this tax year (or $1,200). The “ESCT rate threshold amount” is therefore $61,200. The ESCT rate per the schedule above for this employee is therefore 30%. From 1 April 2012, the employer deducts 30% ESCT from each contribution before paying the net contribution to the KiwiSaver scheme. The ESCT deducted is included in the Employer deduction form (IR 345).
ESCT is deducted from the employer contribution and so reduces the value of the amount that ends up in the KiwiSaver scheme and is therefore not likely to be an additional cost for employers unless the employment agreement stipulates otherwise so that the employer’s contribution is grossed up in order that the employee receive the full entitlement.
Alternative – taxed as salary and wages
If employers agree, employees can choose to have all or part of the employer’s superannuation contribution included in their gross salary and wages to be taxed at personal tax rates. Since the marginal tax rate and ESCT thresholds rates are broadly aligned, this is unlikely to result in any material tax savings for employees. Also employees should be aware that this will increase the salary and wages amount that is used as a basis for other purposes such as Working for Families Tax credits, child support payments etc and so may affect entitlements.
There is plenty of time yet, but employers will need to understand and prepare for these changes to make sure their payroll processes are ready. The removal of the 33% rate option may also increase compliance for employers who may have used only this option until now. Potentially employers will need to check that the ESCT rate used is correct for each employee prior to the commencement of each tax year.
For more information, please contact your usual Deloitte advisor.