New rules for selecting SSCWT rates

Sections NE 2AA, NE 2AB, NE 2B and OB1 and Schedule 1 of the Income Tax Act 2004, section 32B of the Tax Administration Act 1994

The rules for selecting Specified Superannuation Contribution Withholding Tax (SSCWT) rates under the progressive scale have been changed so that the rate selected is based on an employee's salary or wages and employer superannuation contributions, instead of being based on an employee's salary or wages alone.

The change is intended to ensure that employee superannuation contributions are taxed at more or less the correct marginal rate for each employee.

Background

In 2004 the SSCWT rules were changed so that employers could elect to use one of four possible methods for taxing employee superannuation contributions:

• Deduct SSCWT, using a flat rate of either 15%, 21% or 33%, based on each employee's annual salary or wages, with thresholds at $9,500 and $38,000.
• Deduct SSCWT, using a flat rate of 33%, regardless of the employee's salary or wages.
• Deduct SSCWT, using a flat rate of 39%, regardless of the employee's salary or wages.
• Treat employer superannuation contributions as salary or wages, and subject them to income tax, through PAYE.

Some taxpayers began to use the first method to achieve tax advantages, by sacrificing a significant portion of their salary to achieve a lower tax rate. An employee would agree to take a much lower salary, in return for increased employer superannuation contributions. If an employee could reduce their salary to below $9,500, then both the salary and the employer superannuation contributions would be taxed at 15%. In extreme cases, tax rates on employment income could be reduced from 39% to 15%.

No employers and employees were found to be using the 39% flat rate.

Key features

The basis for selecting SSCWT rates under the first method has been changed. New section NE 2B of the Income Tax Act 004 allows employers to elect to use the rates specified in Schedule 1, part A, clause 10(a) for the SSCWT rate threshold amount for the employee. The SSCWT rate threshold amount is defined in OB 1 as the total of an employee's salary or wages and employer superannuation contributions in the previous year. The effect of this is to base SSCWT rates on the total of salary or wages and employer superannuation contributions, instead of on salary or wages alone.

To ensure that individual employees whose salary or wages is close to a threshold are not disadvantaged, the thresholds for the SSCWT rate threshold amount are set at about 120% of the equivalent income tax thresholds. This means that an employer superannuation contribution would need to exceed 20% of salary or wages before the employee was taxed at a higher rate on employee superannuation contributions than the marginal rate he or she was taxed at on salary or wages.

The new rates and thresholds are in Schedule 1 and shown below.

Employers can still elect to use the 33% flat rate (33% SSCWT on all employer superannuation contributions regardless of salary or wages), and employees can still elect to use the PAYE method, with the agreement of their employer. However the 39% flat rate has been removed because it was not being used (repealed section NE 2AA).

Tax Administration Act section 32B(1)(b)has been amended so that for the purposes of calculating Fund Withdrawal Tax, the rules that were in force up to 1 April 2007 are applied to contributions made up until 1 April 2007, and the rules that will apply from 1 April 2007 are applied to employer contributions made from 1 April 2007 onwards.

Application date

The new rules apply from 1 April 2007.