Here is how you already pay tax on your KiwiSaver
The Government revealed plans this week to apply GST to KiwiSaver fees – then quickly changed its mind in the face of public outrage.
But we already pay significant tax on KiwiSaver and it reduces balances to a much greater extent than the GST plan would have.
Here is how it works.
How is KiwiSaver taxed?
The way KiwiSaver is taxed is referred to as TTE – or taxed, taxed, exempt. That means you pay income tax on money you contribute to the scheme, tax is then paid on the returns the investments make but there is no tax paid when you withdraw the money.
Initially, employer contributions were untaxed but that changed in 2012. KiwiSaver schemes pay tax on their investments in different ways, depending on the type of investments they hold.
There is generally no capital gains tax on Australasian shares, for example, while 5% of the value of other international shares is counted as income each year and taxed. Residential property and bonds are treated differently again.
Investors in a PIE scheme, which covers most KiwiSaver funds, pay tax at a prescribed investor rate (PIR) of 10.5% for those who earn up to $48,000 a year including investment income, 17.5% up to $70,000 and 28% over $70,000.
How does that compare with other countries?
Many other countries apply an EET regime – exempt, exempt, taxed. That means investments are made from gross income, not after-tax, investment activity is not taxed but there is tax applied when the money is withdrawn. Investors get the benefit of a tax break for any contributions they make and the absence of tax on returns gives them more money to compound year on year.
Are we getting a raw deal?
Tax expert Terry Baucher said the settings meant New Zealand savers investing the same proportion of their gross income as people overseas amass smaller nest eggs.
The effect of tax on investment activity was much more significant than the $20,000 the GST change was predicted to reduce a typical balance by at retirement.
Baucher said it should change, in part because much of the investing activity was really just delayed consumption. ‘‘A tax break for contributions would benefit the wealthier . . . but taxing while the money is locked up is unfair. The savings are locked away but when the funds come out they will be spent and the Government will collect GST on that.’’ He said he would be in favour of moving to a scheme in which contributions still came from taxed income but investment activity and withdrawals were not taxed.
Geof Nightingale, PwC tax partner and a member of the Tax Working Group, agreed investors were worse off due to the settings.
‘‘Broadly [overseas] they allow you to put gross income into your super fund, so instead of paying 30c tax on the dollar you put the whole dollar in so that means your contributions are larger . . . then they don’t tax, or very concessionally tax, the fund itself so your savings build up faster but then they tax you when you withdraw it, although usually on a concessional basis.’’
But Nightingale said investors did have a bit of a tax concession in KiwiSaver because of the PIR regime. ‘‘If I am on $14,000 and I earn a dollar of labour income over $14,000, my tax rate on that next dollar is 17.5% but if I earn that dollar through investment returns in KiwiSaver I can keep my 10.5% rate all the way up to that $48,000 tickover point.’’
Employer contributions are similarly less taxed. ‘‘If the employer gave the employee an extra dollar of salary it would be taxed at 17.5% but if they put the extra dollar in their KiwiSaver it would only be taxed at 10.5%.’’
He said the $521 from the Government each year for people who contributed at least $1042 was also effectively a tax credit.