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How Do KiwiSaver Tax Credits Work In Year One?

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Contributor:
Mary Holm
Mary Holm

Question:

Not sure if you mind, but using information from your KiwiSaver
book, a colleague and I put together a PowerPoint presentation of the
pros and cons of KiwiSaver for our Indian community organisation in
Wellington.

The members of this organisation would not
typically read the newspaper or go to the internet to find out about
KiwiSaver. You will be pleased to know the seminar was well received.

I
have joined KiwiSaver myself. Your book talks about the tax credits of
$1040 per year. From this, I got the impression that you could still
receive the $1040 tax credit by not having to contribute regularly at,
say, $20 per week, but as long as you contributed the $1040. I am
self-employed so have chosen to make an annual lump sum contribution of
$1040 every year.

I joined the provider in early March. My
provider confirmed verbally to me that my lump sum of $1040 would still
attract the full tax credit, which is paid in early July of every year.

However,
someone I know is adamant that the IRD would only apply the tax credit
at a level of $20 per week for the number of weeks you have been in
KiwiSaver to June 30 every year. The IRD KiwiSaver website said the
same thing.

Had I known, I would not have contributed the
$1040 in March, but instead put in closer to $300, which is about the
level of tax credit I would get at $20 a week from March 1 to June 30.
I would then put in $1040 on July 1 every year, which in future would
attract the full $1040 tax credit.

Sorry for the long
rambling as I get to my questions. What recourse do I have with my
provider for giving me incorrect information, which led to my decision
to put in $1040 on March 1?

And is there any way I can reverse my contribution of $1040 and change it to a $300 contribution?

I
am still pleased with my provider and have no intention of swapping. I
just want to correct the decision I made based on incorrect information.

Answer:

My KiwiSaver book didn't go into detail about the first-year KiwiSaver tax credits being proportionate to how much of the July-June year you were contributing. The Government didn't reveal that information until after I wrote it.

 

Given that government officials in three departments checked the book for accuracy before it was published, I suspect they didn't know about it either. That's what happens when a government radically changes a programme weeks before it is implemented.

Since then, though, I have written heaps about it in columns and on my website, but perhaps you missed them. What your friend and the Inland Revenue website say is correct. Note, though, that after their first year in KiwiSaver, non-employees can contribute $1040 - more accurately close to $1043 - in a lump sum any time up to June 30 and still get the full tax credit.

So there's no need for you to put next year's money in on July 1. You've got almost a year to do it - although I suggest you deposit it by early June next year in case it takes a while to process.

On your specific questions, Inland Revenue says you can't reverse your contribution.

I'm not sure what recourse you have with the provider and, to be honest, I can't be bothered finding out.

It's hardly a huge injustice that you get only a third of the credit when you've been in the scheme for only a third of the year. And the $1040 you've put in is still yours, to be spent in your retirement. It's not like a tax.

By the way, you're optimistic to expect your tax credit in early July.

First, the provider has to send Inland Revenue a list of how much each member has contributed up until June 30. Then Inland Revenue has to send the tax credits to the provider within 30 working days, and then the provider has to distribute the money to each account.

It will be interesting to see how long it all takes the first time. Given how long various other KiwiSaver transactions have taken, I wouldn't be holding my breath for tax credits until at least August, if not later.

Your letter raises some important points for others in KiwiSaver:

* Non-employees planning to contribute between now and June 30 should note that unless you joined KiwiSaver near the start of last year, you won't be eligible in your first year for a full $1043 tax credit.

You might want to estimate your credit and then contribute just that amount in the first year - in the same way as our correspondent wishes he had contributed only about $300.

For most non-employees, the key date for calculating your credit is the first of the month in which your first contribution - no matter how small - was made. From that date, the maximum tax credit is $20 a week.

The exception is those who joined in July through September last year and made their first contribution before October 31. For them, the key date is the first of the month when they joined.

* I have suggested that employees earning less than $26,000 - whose 4 per cent contributions therefore total less than the maximum tax credit of $1043 - might want to top up your contributions in June so you get the full tax credit.

But you, too, should note that in your first year in KiwiSaver, your maximum tax credit is $20 a week, starting from the first of the month that you joined. Any contribution beyond that won't be matched by the Government.

* Employees earning more than $26,000 don't need to take any action. But you should be aware that, unless you joined last July, your tax credit will be less than $1043 in your first year.

* The message for everyone who hasn't yet joined KiwiSaver is to get in and start contributing as soon as possible. The earlier you start, the bigger your first year tax credit will be.

* For more information on all situations, see the bottom of the KiwiSaver book page on www.maryholm.com.

PS: That's great that you used my book for your presentation, and that lots of people came. I'm sure you played fair and told people the source of your info.

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