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Why should employer contributions not simply be included in gross earnings? Then we could forget about ESCT deductions.
If employer KiwiSaver contributions were included in employee gross earnings, and then taxed as part of employee income, the additional tax paid would be the same or very similar to the ESCT deducted.
Trouble is employer KiwiSaver contributions are not employee income. They are payments made to a third party on behalf of the employee.
If employer contributions were included in gross income some of the many side effects would be
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My employee says the employer should pay the ESCT on top of the employer KiwiSaver contribution. They say it is not fair they are now receiving less in their KiwiSaver account because of the ESCT deduction. What do I say to my employee?
Your employee has a good point. They are receiving less in their KiwiSaver account because of the ESCT deduction.
Trouble is, you as an employer are still contributing the amount required, and complying with your obligations.
A superannuation contribution is defined as the amount actually paid, plus any ESCT deducted.
Unless there is written agreement to the contrary, you as an employer are complying with your obligations.
See Section RD65 Income Tax Act 2007 for the definition of a superannuation contribution.
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We are a non profit and therefore tax exempt. Does this mean we don't need to deduct ESCT from the KiwiSaver Employer Contribution as this is a tax?
Non profit organisations must still deduct ESCT.
ESCT is, in effect, an employee tax. The employers superannuation contribution is the nett contribution that the employee receives plus the applicable tax.
Non profits are not exempt from ESCT - in the same way that their employees are not exempt from PAYE.
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ESCT is going to result in the Government getting a lot of extra money! Will I need to re-do my budgets because of this extra cost?
In most cases, no. The employer contribution remains the same, but the employee will get less into their KiwiSaver account because the tax comes off the employers contribution. There is no new cost imposed on the employer.
The only exception to this is if the employer has contractually agreed to pay the ESCT on top of the Employer Contribution. In this case, a real cost is incurred by the employer.
Income Tax Act 2007
Contribution in money for benefit of employees
(1) An employer's superannuation cash contribution means an employer's superannuation contribution paid in money either to a superannuation fund or under the KiwiSaver Act 2006 to the Commissioner for later payment to a superannuation fund.
Determining amount of contribution
(2) The amount of an employer's superannuation cash contribution is the sum of
(a) the amount of the contribution received by the superannuation fund or, for a contribution paid to the Commissioner under the KiwiSaver Act 2006, received by the Commissioner for payment to the superannuation fund; and
(b) the amount of tax withheld for the employer's superannuation contribution.