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KiwiSaver tax rates need fixing, world’s ‘most punitive’, says savings lobby

New Zealand's tax system heavily penalises KiwiSaver while offering massive tax breaks to property investors and needs to change, says savings lobbyist the Financial Services Council.

Its executive director, Peter Neilson, issued a plea to political parties on the issue, which sees New Zealanders relying on retirement savings to save nearly twice as much per week as necessary to secure a comfortable retirement.

"At a practical level this means a person on an average income would have to save $16 a day rather than $27 (63% less) to achieve a comfortable retirement income," said Neilson, a former Revenue Minister in the David Lange Labour government of 1984-90.

"For a typical person saving for retirement, just 10 percent of their retirement earnings comes from the initial contributions and a massive 90 percent from compound returns," said Neilson.

Yet the way compound earnings are taxed at the moment means a person paying the top personal tax rate of 33 cents in the dollar can expect to lose more than half (54.7 percent) of their KiwiSaver retirement income, "due to the impact of taxation over 40 years."

"New Zealand now has the world's most punitive tax regime for retirement savings when compared with investments in rental housing," he said. "If the same person invested in rental property their effective tax rate would be only 7.9 percent" if the property was based on a 20 percent deposit.

"If that period of ownership dropped down to only 10 years the rental investor would receive a tax credit, a payment from the IRD - effectively a subsidy for investing in rental property. We can't all be rental property investors," Neilson said.

The FSC proposes cutting the current KiwiSaver fund tax percentage rates of 28, 17.5 and 10.5 to 15, 8 and 4.3 respectively.

Paying for this would require sacrificing the $630 million annual cost of the $521 that KiwiSaver members can claim against their tax each year, but the $1000 tax-free KiwiSaver join-up incentive could be kept, said Neilson.

"Regardless of whether KiwiSaver is universal (compulsory) or voluntary, the over-taxation of KiwiSaver funds has to be addressed," Mr Neilson says. "Leaders of all parties should say if they support or oppose introducing fair taxes on savings. Fairer taxes will have a huge impact on the future incomes of New Zealanders when they retire."


Comments and questions

Shhh don't let the secret out - tax breaks or favourable rates are only for the property owning classes not for those who work and save!

Erm, false dilemma pal. I think you'll find a much larger proportion of property owners also work and save, when compared to the proportion of tenants (of HNZC and private landlords).

Most National politicians and supporters make most of their money out of rental houses by tax write offs.
No National Government is going to make rental housing less attractive.

At the moment it is a no brainer to put your money into rental properties and receive a 16% tax free capital gain PLUS receive rent.
Kiwisaver or any other form of investment cannot compete.

Erm, National actually reduced both the top rate of personal income tax (thus reducing the notional "subsidy" for loss-making rental property), plus amended the LAQC/LTC rules to make mixed-use rentals less favourable. But don't let the facts get in the way of your sweeping generalisations.

I predict that this matter will be addressed by reducing the tax breaks on property investments thus making kiwisaver proportionately a better option by comparison. I very much doubt that tax breaks will also be made on Kiwisaver.

Yeah, waddaya know. Yet more evidence of how Key's tories are hell bent on increasing the wealth gap.

Tax cuts. Huh.

Great work by the hitherto unknown Financial Services Council. Presumably, the less tax paid by FSC members' clients, the more money those clients have to give up in fees.

This argument does the FSC no credit whatsoever. It is silent on the $1000 KiwiSaver kickstart, the annual government subsidy (known as a member tax credit) which can represent an immediate 50% tax free profit on the annual contributions of an adult saver saving $22/week, the tax free capital growth on assets such as shares and property, or the use of imputation credits from dividends which can be used to offset tax on bonds and cash. Futhermore, KiwiSaver tax is a final tax under the PIE regime, so no further tax liability accrues for those on higher personal tax rates (the maximum KiwiSaver tax rate is 28%, versus the 33% top PAYE rate).

If the FSC was prepared to factor in these enhancements, they would not be so quick to go "rent seeking" from the government by way of lower taxes. I am unaware of any other industry in New Zealand that has seen it's market grow as phenomenally rapid as KiwiSaver, yet still they complain, purportedly on behalf of their members.

And this from an industry dominated by banks which ran to the taxpayer (aka the Crown) for support during the GFC. Their greed seems boundless.

Another self interest group pushing their own cart.
Property is taxed the same as any other investment.
Labour's solution of a capital gains tax will hit Kiwisaver share sales the same as property sales. Haha, take that Mr Neilson, you will be paying a further tax on your Kiwisaver investments should Labour win.

I agree with the comments in this article concerning KiwiSaver. And it's not about property investment bashing. The facts are quite clear. Unlike in Australia where pre-tax dollars are salary-sacrificed into the super scheme and the investment enjoys unfettered compound interest until taxation is applied when funds are finally withdrawn, by comparison NZ's scheme is the polar opposite and hugely inferior. In NZ we can only invest (expensive) after-tax dollars and all gains are routinely taxed throughout. We do indeed miss out on the benefits of compound interest and the impact on ROI is significant. That is a fact. It's better than no superannuation scheme, of course. But the focus on taxation at every point is wrong. And the NZ K/S investor is the loser.

FYI Property investment in NZ is NOT taxed the same as other investments. I own a few residential investment properties and I enjoy significant tax advantages through this.

Property should not be given the same tax breaks as other investments.
Investing in existing rental houses do not create any jobs and are detrimental to the well being of the majority of NZers by pushing up prices.

All tax deductions for expenses should be removed.

As most of our "leaders" are up to their eyeballs in rental properties, nothing will change.

'Members Tax Credit' deposited into the members KiwiSaver investment each year
a claim against their tax next year........

In addition to the required contributions, employees can make voluntary contributions to the AFP that holds their retirement account. Voluntary contributions have a limit of U.S.$2,000 per month. Required contributions are tax deductible, as is the income accrued to the accumulated fund during the contributor's active life. Voluntary contributions, on the other hand, are not tax deductible. Income accrued to voluntarily contributed funds is, however, free of taxes. Once workers retire, however, their pension becomes subject to income tax, as with any other source of income.

Chile's tax reform to knock 6% off pension savings, says AFP Habitat
By Kieran Lonergan - Monday, April 14, 2014 Pension fund clients who entered the system today would see their final pension fall by close to 6% due to the tax reforms proposed by Chilean President Michelle Bachelet. .

One day NZ may catch up with the rest of the world instead of being like sheep following each other along the same old path. Fees, taxes, side entities dragging out reserve surpluses, internal selling between funds to allocate the poor performing assets to the people and keeping the top performing for management...and shall I keep going. One day we might actually have self-managed superannuation funds (SMSF) as Australia has. Then we can invest our funds into property and do really well.

The KiwiSaver industry would naturally like to see tax cuts for you... to make their returns better, attract more funds to manage, earn more in fees... and then to make it compulsory as well, so you will have no choice but to make them even richer as they merrily clip the ticket. Don't buy it.