Tax plan impact on KiwiSaver may lessen

Hundreds of thousands of KiwiSaver investors may get a nice surprise when the Tax Working Group issues its final report on Thursday. When the working group published its interim report in September, KiwiSaver looked like one area where middle-income Kiwis as well as high-earners would be most likely to lose out from a capital gains tax (CGT). This was where working group chairman Sir Michael Cullen was perhaps at his most ‘‘Robin Hood’’.

But new thinking is expected to mean people earning up to $70,000 a year, and not just low-income earners, should see benefits proposed that would – for most of them – far outweigh any extra taxation.

The bad news is of course that if the working group’s recommendations are accepted, KiwiSaver funds would be required to pay tax on the gains they made on New Zealand and Australian shares, which they don’t do now.

The working group estimated in September that would mean KiwiSavers effectively paying an extra $60 million in tax annually from their nest eggs, though that estimate depends on a number of assumptions. KiwiSaver funds would pay tax on an ‘‘accrual’’ basis on their New Zealand and Australian shareholdings, each year.

Individual KiwiSaver investors would see the pinch reflected in their KiwiSaver balances and would feel it when they retired and received a correspondingly lower payout from those share investments.

There would be no major changes to the taxation of other investments in KiwiSaver funds, which can also include cash deposits, as well investments in bonds and non-Australian foreign shares – gains from which are already subject to some form of tax. That means the impact of a CGT on KiwiSaver investors would depend on what type of fund they had invested in, with investors in riskier, ‘‘growth’’ funds generally suffering most.

If the working group sticks with the details set out in its interim report, after April 2021 funds would pay tax on an accrual basis on 3 per cent of those assets. KiwiSaver investors would therefore see new tax whittle away a fraction of a per cent of their KiwiSaver nest eggs each year – between about 0.025 per cent and 0.2 per cent, depending on their income tax band and fund type.

Now for the good news. For low and many middle-income earners, improved tax breaks recommended by the Tax Working Group to encourage retirement savings should outweigh any extra tax. Its interim report recommended removing Employer Superannuation Contribution Tax (ESCT) on employers’ KiwiSaver contributions of up to 3 per cent of people’s salaries, for workers earning less than $48,000 a year.

That would be a significant benefit for low-income KiwiSavers, worth an estimated $180m a year.

It also recommended reducing the lower rates of PIE tax – which is the type of tax that applies to KiwiSaver investments – by five percentage points each. That would deliver another $35m a year to KiwiSavers earning up to $48,000 a year.

But since September, the Tax Working Group is understood to have become concerned about suddenly cutting off the ESCT benefit at $48,000 and the impact that could have on people’s marginal tax rate, which is already high at that income point. So expect it to instead recommend extending a ‘‘phased’’ ESCT tax break to KiwiSavers earning between $48,000 to $70,000.

Assuming that change is confirmed on Thursday, people earning up to $48,000 would get the full benefit of untaxed KiwiSaver contributions from their employer, up to the 3 per cent salary cap, with that benefit reducing to zero only at the top of the $48,000 to $70,000 income band.

The bottom line is that KiwiSavers earning between $60,000 and $70,000 could expect to be a few hundred million dollars better off a year in total from the proposed tax changes. Those earning more than that could expect to be about $45m worse off a year, remembering that some of the impact of the changed tax treatment of Australian and New Zealand shares ($15m, the working group estimated) would fall on lower-income earners.

The exact cut-off point between ‘‘winners and losers’’ would depend both on the types of KiwiSaver funds people had and how much they had invested in them.

It would be no surprise if the Government backed off taxing capital gains on New Zealand and Australian shares held by KiwiSaver funds because of political considerations – assuming it does push ahead with a CGT at all, which is perhaps the biggest ‘‘if’’ of all.

However, should it implement a CGT but decide not to tax Australian and NZ shares held by KiwiSaver funds, expect more howls from the sharebroking community and dire warnings about the liquidity of NZX stocks and the risk of the ‘‘hollowing out’’ of the NZ economy.

Given that gains on privately held New Zealand and Australian shares would still be subject to a capital gains tax, that approach would skew investment incentives sharply away from private investing and towards a more generous KiwiSaver scheme.