Tax experts are stunned at the Government's Budget announcement that it will take up to one third of employers' contributions to KiwiSaver accounts.
Changes to KiwiSaver announced in the Budget yesterday included removing the tax exemption for employer contributions, halving the member tax credit and upping minimum contribution rates from 2 per cent to 3 per cent, all moves designed to save the Government $2.6 billion over the next four years.
While the change to the Employer Superannuation Contribution Tax (ESCT) was first mooted by the Government's Savings Working Group, it did not feature strongly in industry discussion in the lead-up to the Budget.
"The changes to the taxation of employer contributions are a surprise and will be a double-whammy to KiwiSaver members," Aaron Quintal, a tax partner at accounting firm Ernst and Young, said. "Not only is the Government contributing less [through a reduced tax credit] but now it will take up to a third of the employer's contribution in the form of Employer Superannuation Contribution Tax."
Compulsory contributions to KiwiSaver, unlike contributions to other super funds, have previously been excluded from ESCT.
Using the example of an $80,000 salary, even though the employee and the employer will each contribute an extra $800 to KiwiSaver post-April 1, 2013, the total contributions to the fund will increase by less than $400 because the Government has halved its contribution and then taken around $700 from the employer's contribution, Quintal said.
Pre-Budget speculation had been around whether the ESCT exemption would be extended if there was an increase in the compulsory contributions or whether it would be left the same.
Deloitte tax partner Greg Haddon said the move on ESCT was "a surprise and it is a bit of a tax grab". David Ireland, who chairs the industry group Workplace Savings, said it appeared the Government was pulling away from what was once one of the fundamental attractions of KiwiSaver.
He said that KiwiSaver remained a relatively low-cost scheme, but the changes would take some of the gloss off it.
But John Body, managing director of ANZ Wealth, said KiwiSaver was still the best vehicle for saving towards retirement.
"These changes do not derail the fundamental benefits and design of the scheme."
Changes to KiwiSaver, which are aimed at saving the Government up to $2.6 billion over four years, include:
* For the year ending June 30 2012 and beyond: The Member Tax Credit will halve to 50c for every $1 contributed by members up to a maximum of $521 a year. The first tax credit payments at these new levels will occur in the second half of 2012.
* April 1 2013: The minimum employee contribution and compulsory employer contributions rise from 2 per cent to 3 per cent.