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Working for Families

Family scheme income and withdrawals from KiwiSaver

(Clause 61)

Summary of proposed amendment

The bill amends the Income Tax Act 2007 to ensure that a withdrawal made from KiwiSaver after the member has reached the date of entitlement to withdraw is not regarded as family scheme income of the individual under the Working for Families (WFF) tax credits rules.

The amendment also applies to earlier withdrawals made under the KiwiSaver first home purchase, significant financial hardship and serious illness rules, and to withdrawals from complying superannuation funds.

Application date

The amendment will apply from 1 July 2007, the date when KiwiSaver started.

Key features

Section MB 5 of the Income Tax Act 2007 is being amended to ensure that if an individual makes a withdrawal from their KiwiSaver fund under first home purchase, significant financial hardship and serious illness rules, or after the “end payment date”, this will not be counted as family scheme income.

The amendment will also apply to withdrawals made from complying superannuation funds.

Background

Section MB 5 of the Income Tax Act 2007 contains a provision to address situations when a person’s income for WFF tax credit entitlement purposes is apparently reduced by channelling income through a superannuation scheme. This rule means that the distributions received are counted as the individual’s family scheme income (to the extent that the distribution does not consist of amounts that the individual contributed themselves).

Section MB 5 applies if an individual receives a distribution from the superannuation scheme in an income year and:

  • the employer of the individual has made contributions to that superannuation scheme, either in the current income year or in either of the previous two income years; and
  • the individual continues to work for that employer for at least one month after receiving the distribution; and
  • the distribution was not a result of their retirement from employment with that employer.

The KiwiSaver rules in Schedule 1 of the KiwiSaver Act 2006 govern when members may withdraw their funds. The general rule permits withdrawal on or after the KiwiSaver “end payment date”, which is the later of the date that the member reaches the NZ superannuation qualification age (currently 65) or five years from the date of joining KiwiSaver (or a complying superannuation fund).

KiwiSaver schemes must allow withdrawals before the “end payment date” for certain purposes; including:

  • first home purchase;
  • significant financial hardship; and
  • serious illness.

A withdrawal from KiwiSaver (or a complying superannuation fund) is regarded as a distribution from a superannuation scheme. This means that the amounts withdrawn under these KiwiSaver provisions could be included as part of an individual’s family scheme income if the individual continues to work for their employer after making the withdrawal, and their employer has made employer contributions to KiwiSaver in the current or previous two income years. This outcome is inconsistent with the original policy intention.