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Government quietly introduces $103b Kiwisaver tax

Author
Thomas Coughlan, NZ Herald,
Publish Date
Tue, 30 Aug 2022, 4:18PM
Prime Minister Jacinda Ardern and Revenue Minister David Parker. Photo / Mark Mitchell
Prime Minister Jacinda Ardern and Revenue Minister David Parker. Photo / Mark Mitchell

Government quietly introduces $103b Kiwisaver tax

Author
Thomas Coughlan, NZ Herald,
Publish Date
Tue, 30 Aug 2022, 4:18PM

New tax rules will see the Government net an additional $225 million in tax each year by streamlining the way fees on things like Kiwisaver funds are taxed by GST.

The tax will hit Kiwisaver balances hard. Modelling from the Financial Markets Authority warns the tax and its compounding effects will hit Kiwisaver balances by $103 billion by 2070.

This compares to total Kiwisaver balances which are expected to be $2196b in 2070.

Non-Kiwisaver funds will be hit by $83b. Total fund balances in 2070 would be $1757b. The figures were included in a Regulatory Impact Assessment (RIA) published with the rule change.

That amount of lost saving is equivalent to more than half the size of New Zealand's 2022 GDP.

Revenue Minister David Parker said the rules would fix the "inconsistent treatment of GST-able services depending on the way people currently invest".

When asked whether he was concerned it would simply direct funds from savers into the Government's pocket, Parker said there would be a long transition period.

"That payment is transitioned into over a long period of time ... over that time the market will respond accordingly. If fees are already at a competitive rate it might flow through in fees - if not, it may well be there is no effect on fees," Parker said.

National's Finance spokeswoman Nicola Willis said the change was "yet another tax grab by a Government that seems obsessed with dreaming up new ways to fleece New Zealanders of their hard-earned cash".

She said the change would reduce "the value of their savings in retirement."

Act leader David Seymour leant some lukewarm support to the change, but only in the context of Act's overall policy to radically lower income tax rates.

Seymour said he supported "low-rate, broad-based taxes" and believed "all goods and services should be treated equally for fairness and simplicity".

"We acknowledge that applying GST equally to all funds would slightly increase overall taxation. However, we note that total taxation is driven by total Government expenditure, so making the tax system simpler and fairer is a separate issue from the overall level of taxation".

The Financial Markets Authority has advised IRD that it believes the fees will be passed on in the form of increased fees.

IRD warned the Government the rule change will simply be passed on to savers, costing people thousands of dollars in lost savings over their lifetimes.

The RIA said that the current tax rules for management services were "complex and inconsistent" and that they could "distort competitive behaviour" by favouring one fund structure or another based on how it was taxed.

The issue at heart is that financial services are currently exempt from GST, but some services are not.

The Government has opted to streamline the rules by effectively mandating one rule for all, mandating that all management service fees be hit with a flat 15 per cent GST rate.

Streamlining the rules means people investing in managed funds can no longer take advantage of favourable tax treatment, but it will also mean that thousands of Kiwisaver users will likely be hit with higher fees and lower savings balances.

The RIA warned that once the rules are phased in in 2026 the Government will collect "additional GST of approximately $225 per annum".

This amount would increase by about 10 per cent a year as the economy and Kiwisaver funds grew.

IRD thinks this cost will be passed on to people who use Kiwisaver and will result in smaller savings funds.

The RIA said the rule change "will largely flow through to retail investors in the form of higher fees. If investor fees are increased, this will reduce after-fee returns and therefore the total amounts that are reinvested and saved over time".

IRD presented two options for how the scheme would work for ordinary people who used managed funds or Kiwisavers.

The examples illustrate that even small annual changes quickly compound into thousand-dollar fees as savers and investors missed out on compounding returns from their funds.

Someone with $37,500 in a fund charging a 0.8 per cent fee would currently pay a $300 annual fee. Under the new rules, if the cost of the rule change were passed through to the investor, that fee would rise to $359, costing the investor $6,490 over 25 years of contributions.

Someone with $100,000 in a fund charging a 1 per cent fee would see their fees increase by $96 a year. This would cost them $21,179 over 25 years.

The average Kiwisaver balance for someone in their 40s is $37,000.

Deloitte GST partner Allan Bullot said the bill is designed to address an historic issue.

"Superannuation schemes have always been exempt from a GST perspective. Where there have been questions are around managed funds that aren't Kiwisaver funds," he said.

These are funds that operate as savings and investment vehicles like Kiwisaver funds, but are not actually Kiwisaver schemes.

These funds have historically been subject to an effective 1.5 per cent rate of GST after a compromise between the industry and the tax department that saw 10 per cent of the funds as subject to GST and 90 per cent exempt.

Bullot said the legislation was designed to harmonise these rules, and that Kiwisaver schemes were "collateral damage" as evinced by the fact that Kiwisaver funds were raising more revenue than other funds.

The Government did not announce the changes, but included them in a regular tax bill.

The only part of the bill the Government announced was the removal of Fringe Benefit Tax on public transport.

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