Employer superannuation contribution tax

Sections RD 64, RD 65, RD 67 and RD 69 to RD 71 of the Income Tax Act 2007; sections 22, 47, 98 and 143A of the Tax Administration Act 1994

Changes have been made to the Income Tax Act 2007 and the Tax Administration Act 1994 to codify the long-established practice of deducting employer superannuation contribution tax (ESCT) from superannuation contributions made on behalf of past employees, at the ESCT rate of 33%.

Key features

• ESCT must be deducted from superannuation contributions made on behalf of past employees.
• A flat ESCT rate of 33% applies to superannuation contributions made on behalf of past employees.

Detailed analysis

Employer superannuation cash contributions are paid for the benefit of their employees, and are subject to employer superannuation contribution tax (ESCT). Although the majority of employers who pay employer superannuation contributions do so for their current workforce, some employers may occasionally make contributions for the benefit of past employees, particularly in relation to defined benefit schemes.

The original policy intent was to apply the ESCT rules to contributions made for the benefit of past employees. This has been the generally accepted and long-standing practice of employers, practitioners and Inland Revenue. However a technical inconsistency was identified in the definitions of "employer" and "employee" in the Income Tax Act 2007, as they apply in the ESCT rules, which meant that they did not cover employer superannuation contributions paid for former employees. Instead these contributions were taxable as fringe benefits.

These amendments ensure that the ESCT rules apply to superannuation contributions paid by a person for the benefit of their past employees, by changing the definition of an employer's superannuation cash contribution to include such contributions.

The rate at which ESCT must be deducted from these contributions is set at a flat rate of 33%. This ensures consistency with the approach for defined benefit schemes. The variable rates that employers must apply to contributions on behalf of current employees from 1 April 2012 cannot be used because the variable rates rely on recent salary or wage information that is not applicable in the case of a past employee.

Application date

The amendments apply from 1 April 2008.

There is a "savings" provision for any returns filed on a different basis before the introduction of the bill on 14 September 2011. Where this applies, Inland Revenue will consider the basis on which employers have filed their ESCT returns in light of the previous legislative position.

Note: The Taxation (Budget Measures) Act 2011 contained some other changes to the ESCT rules, which apply from 1 April 2012. This necessitated these amendments being drafted in two stages, but the overall outcome is the same.