The Government was warned about the over-taxing of KiwiSaver members a year ago by a group of financial advisers who said Kiwis were likely to have overpaid tax by more than $70 million.
The nine advisers, wrote an open letter to the head of the Financial Markets Authority Rob Everett, Reserve Bank governor Adrian Orr, Finance minister Grant Robertson and Commerce Minister Kris Faafoi explaining their concerns about KiwiSaver and calling for change.
They warned that many of the lowest income earning KiwiSaver members were paying tax at the highest possible rate of 28 per cent when they should have been taxed at 10.5 per cent or 17.5 per cent.
"The IRD supplied default KiwiSaver fund with default member account details but not the member's tax rate, so unless a fund successfully contacts members and gets their tax rate, it is required to deduct tax at 28 per cent, the maximum rate.
"This problem is likely to have affected the majority of those who have been enrolled in a default KiwiSaver fund."
The advisers estimated for the six years ended 2018 this amounted to an estimated $70 million in excess tax.
As the tax is a final tax, those who overpay it are not able to claim a refund. Where as those who underpay it will get a tax bill.
This week it emerged that 450,000 Kiwis were paying the wrong tax rate for managed fund investments including KiwiSaver after IRD moved to a new automated and digitised system in April which has the ability to detect who is paying the incorrect rates.
Around 120,000 have been sent a letter warning them they were not paying enough tax.
At the time of the letter from the financial advisers Robertson's office acknowledged it had received the letter but minister Faafoi would be responding to it.
In a letter date June 8 Faafoi said issues about the prescribed investor rate did not fall within his portfolio but he had raised concerns with the tax department.
"I have raised your concerns with Inland Revenue officials for them to consider whether it would be possible to make further enhancements to the process for providing PIRs (prescribed investor rates] to scheme providers."
But no change was made.