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Tax Error And Axing Fee Subsidy Softens KiwiSaver Changes

Contributor:
Fuseworks Media
Fuseworks Media
Bill English
Bill English

Wellington, Dec 9 NZPA - An overestimate of the costs of tax cuts and axing the annual $40 KiwiSaver fee subsidy is going to soften the blow for low income workers using the savings scheme, Finance Minister Bill English said today.

The Government today released its final KiwiSaver and tax packages that are to be included in the Taxation (Urgent Measures and Annual Rates) Bill to be passed in Parliament this week.

Under changes it announced before the election, contributions to KiwiSaver will be lowered to 2 percent of the weekly wage, matched by the Government.

Under Labour, savers could contribute either 4 or 8 percent with a government subsidy of up to $20 a week and compulsory employer contributions, rising to 4 percent by mid 2011.

However, the changes meant those earning under $52,000 would not get near the $1040 subsidy cap before they reached 2 percent of their income, effectively reducing the incentive for those people to save.

Mr English said instead of limiting the subsidy to 2 percent of wages, there would be a dollar for dollar subsidy of up to $1040 for low and middle incomes.

"The Government has decided to abolish the member fee subsidy of $40 per year to help manage the cost of this decision," Mr English said.

On top of this when Treasury costed National's tax cuts plan it found they would cost $566 million less over five years than Mr English estimated while in opposition.

The effect of these two changes means the net impact of the combined tax cuts package and changes to KiwiSaver would have an overall cost of just $22 million over five years, he said.

The main changes to KiwiSaver after final decisions are:

* The minimum member contribution rate will reduce from 4 percent to 2 percent, and 2 percent will be the default contribution rate for new employee members from April 1, 2009.

* The member fee subsidy will be discontinued from April 1.

* Compulsory employer contributions will be capped at 2 percent from April 1.

* The employer tax credit will be discontinued from April 1.

* The employer superannuation contribution tax exemption will be capped at the compulsory employer contribution of 2 percent from April 1. (That is equivalent to 2 percent of the employee's gross salary or wages.)

* The KiwiSaver Act will be amended to make it clear that upon joining KiwiSaver, no employee can have their gross pay reduced as a result of employer contributions. The Employer Relations Act amendment relating to KiwiSaver will then be obsolete, and will be repealed from the date of assent of the Employment Relations Amendment Bill.

* The member tax credit of up to $20 a week, the $1000 kick-start, mortgage diversion, deposit subsidy and the first-home withdrawal provisions will be retained.

Mr English said the changes would make KiwiSaver sustainable in the long term.

Tax cuts would go ahead as promised with movements to the tax rates and thresholds costing $6.5 billion over five years and the independent earner rebate costing $1.3 billion over the same period.

Scrapping the research and development tax credit would save $861 million.

Parliament will sit under urgency this week to pass the laws enabling the tax cuts package and KiwiSaver changes to come into effect next April.

The tax changes will result in the top rate to those earning over $70,000 falling from 39 cents to 38 cents.

The 21 percent rate will be payable for those earning between $14,000 and $ 48,000 -- currently $40,000.

There will also be an independent earner tax credit giving $10 a week to those earning between $24,000 and $44,000 if they receive no benefits or Working for Families tax credit.

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