Tax rate correct for Super
KiwiSaver tax rate is called prescribed investor rate, says SHELLEY HANNA
Income from NZ Super is ‘earnings’ even though you are no longer working.
My wife and I sold our business three years ago to retire. We were advised at the time our term deposits and bank accounts and KiwiSaver would have a tax rate of 10.5 per cent. Out of the blue four months ago we received a call from our previous accountant. The IRD had requested last year’s KiwiSaver and our bank’s annual interest return. We ended up with an accountant’s bill of $126 and a tax bill of $256. We were informed by the accountant we should be paying RWT of 17.5 per cent, not 10.5 per cent. On the KiwiSaver form the way we read it, as between the two of us we do not earn and have an income well below the $48,000, our RWT comes out at 10.5 per cent. I have been on the IRD site and have come to the same conclusion. I also looked up the meaning of earnings and it was ‘reward for money obtained for labour or services’. That went by the board for us three years ago when we went on the pension. Can you please explain?
You do not say who advised you to select 10.5 per cent as your tax rate three years ago, but I doubt it was the correct rate for you. If you were receiving NZ Super then your rate should be 17.5 per cent (or higher if either of you earns over $48,000 with other income). Do not combine your income with your wife’s to work it out — each person has their own tax rate depending on what they earn in their own name. Income from NZ Super is ‘earnings’ even though you are no longer working.
Inland Revenue explains the income bands quite clearly on its website. At the end of the tax year you can check if you are due a refund. Everyone pays 10.5 per cent on the first $14,000 that they earn, 17.5 per cent on the income from $14,001 to $48,000, 30 per cent on the income from $48,001 to $70,000 and 33 per cent on income over that.
If the proposed tax changes going through Parliament are implemented, starting in 2019 Inland Revenue will automatically pay out refunds to taxpayers who have paid too much during the year.
There is a difference between the RWT tax rate I have described above and tax on PIE investments such as KiwiSaver. The tax rate on KiwiSaver is called the prescribed investor rate or PIR. PIE tax rates are a bit more generous than RWT for larger income earners as they have an upper limit of 28 per cent. KiwiSaver providers are required to ask their investors each year to confirm their PIR and change it up or down according to their circumstances.
The 10.5 per cent is a rate generally only used by children or people on very low income — eg. a stay at home parent whose partner is the only one in paid work. It is likely IRD has done a sweep of superannuitants who are using 10.5 per cent as a tax rate. IRD will know you are receiving NZ Super and should at least be on 17.5 per cent tax rate — both for withholding tax and PIR (PIR is based on the last two years of income so if in the year before they get Super a person earns very little then 10.5 per cent may be the correct rate for them at that time. But within one or two years of receiving NZ Super they should be on the 17.5 per cent.) As you can see, the tax difference ($256) is not great but it has caused you stress.
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 06 870 3838 or go to peak.net.nz. The information contained in this article is of a general nature and is not personalised. Send your KiwiSaver questions to shel[email protected]