Employer Superannuation Contribution Tax – set and regret

By Mila Robertson & Robyn Walker
 

With Inland Revenue sharpening its audit focus, Employer Superannuation Contribution Tax (ESCT) compliance has been coming under greater review. Checking your calculations now means fewer surprises when IR comes knocking.

Every dollar that employers contribute to KiwiSaver and other complying funds should have ESCT deducted. However, determining the correct ESCT rate can be tricky and from our experience often fraught with errors.

How do you calculate the right ESCT rate for your employees?

It’s conceptually simple, the rate that ESCT is deducted at is based on your employees’ marginal tax rates at 1 April each year.

However, there are some fishhooks to be aware of when determining the rate, which is based on the employee’s expected earnings for the year, inclusive of employer contributions to their retirement scheme (referred to as “the ESCT rate threshold amount”). At a high level, the rules mean that:

• If your employee has worked in your business for the full prior year (1 April to 31 March), then you can look back at their prior year earnings and employer contributions to determine the ESCT rate threshold amount.
• If your employee has not worked in your business for the full prior year, then you need to make an estimate of their salary and wage earnings, inclusive of your employer contribution. This means that usually for the first two years of employment for new employees, employers need to more actively consider what is an appropriate rate for your employee and undertake an estimate.

Topical Issues

In recent years Inland Revenue’s new computer system has been utilised to pick up on when employers are deducting the incorrect ESCT rate on employer contributions to KiwiSaver.

We understand that Inland Revenue have, in some cases, been looking at the ESCT rate employers have deducted, compared to the employment income reported via the wider PAYE system to check for inconsistencies.

As Inland Revenue looks back on ESCT rates applied with the benefit of hindsight, it is important that employers take increased care in determining the rates. We recommend that where estimates are required that these are documented and retained in case of future review.

Common mistakes we see in practice:

• Forgetting to estimate how much you expect your new employees will earn, to determine their ESCT rates.
• If last year was an employee’s first year on employment, their ESCT rate was likely based on an estimate. Don’t forget to recalculate it in year two using their expected full year earnings.
• A “set and forget” mentality being applied to ESCT rates, where the rates are not getting reviewed each year. This means that if a pay-rise or other circumstance has changed an employee’s marginal tax rate year-on-year that this may not be picked up.
• An over-reliance on payroll software. While some payroll software can take a lot of the hassle out of your ESCT compliance, manual checks should still be undertaken as best practice. We recommend that at the beginning of each tax year spot checks are run in situations you expect could be more prone to issues.

What to do if there is an error

The approach to take to an error will differ depending on the number of impacted employees, the duration of the error and whether there is an underpayment or overpayment of tax. A simple isolated error may be able to be easily corrected by filing an IR344 employment information amendment form or amending the PAYE filing online via myIR. An error which spans many employees and many pay periods may be more complex to resolve.

The challenge with ESCT corrections typically occurs when the employer’s contribution has been calculated correctly, but the wrong proportion has been allocated between Inland Revenue (tax) and the Superannuation Scheme (savings). We understand that, in both instances, the allocation between ESCT and KiwiSaver can be corrected by Inland Revenue via amending PAYE filings.

However, when too much money has been allocated to the KiwiSaver fund (i.e. the ESCT rate is too low), this needs to be carefully managed and communicated with the employee, as changing the PAYE filing would remove money from the employees KiwiSaver fund. Given this can be challenging to manage and explain to the employee, employers will sometimes choose to ‘gross up’ the additional amount that went to the KiwiSaver fund, to square up the ESCT due. This means no amount is refunded out of the employees’ KiwiSaver and instead the employer pays an additional amount of ESCT. 

Correction examples

What to do if you identify an error?

If you’ve got it wrong, we recommend that employers should front-foot this with Inland Revenue.

Simple errors can often be self-adjusted via amending your PAYE filings in myIR or directly via your payroll software. The employment information amendment forms (IR344) can also be completed if there are isolated errors, although this is a more manual process.

For bigger errors over longer periods, the best way to approach this usually is via the Voluntary Disclosure process, as this will help with the management of penalties and also demonstrates sound tax governance when an error is found. In these cases, Inland Revenue will address with you how best to resolve the relevant issues.

We also recommend that impacted employees are notified.

For more information or if you have any questions in relation to your ESCT compliance, please contact your usual Deloitte tax advisor.