Family scheme income and KiwiSaver withdrawals

Section MB 5 of the Income Tax Act 2007

A change has been made to the Income Tax Act 2007 to ensure that a withdrawal made from a KiwiSaver scheme or complying superannuation fund is not treated as family scheme income of the individual under the Working for Families (WFF) tax credits rules.

Key features

If an individual makes a withdrawal from their KiwiSaver scheme or a complying superannuation fund, the employer contributions that are withdrawn will not be counted as their family scheme income under the WFF rules, even if they continue in employment.

Detailed analysis

Section MB 5 of the Income Tax Act 2007 addresses situations when a person's income for WFF tax credit entitlement purposes is apparently reduced by channelling income through a superannuation scheme. It 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;
• 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.

If section MB 5 applies, any 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.

A withdrawal from a KiwiSaver scheme (or a complying superannuation fund) is regarded as a distribution from a superannuation scheme. The KiwiSaver rules permit withdrawal on or after the KiwiSaver "end-payment date", as well as providing for early withdrawals for certain purposes; including:

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

Section MB 5 has been amended to ensure that any employer or Crown contributions amounts withdrawn from a KiwiSaver scheme (or a complying superannuation fund) are not included as part of an individual's family scheme income if the individual continues to work for their employer after making the withdrawal.

Application date

The amendment will apply from 1 April 2008, being the date on which the Income Tax Act 2007 came into effect.