What Now For KiwiSaver Investors?
The government’s capital gains tax has been ditched. There are still other changes in the pipeline. Mark Russell, of PwC, explains.
5 October 2021
The government’s decision to rule out pursuing any form of capital gains tax so soon after the release of the Tax Working Group’s final report came as a surprise to many.
New Zealanders with savings in a KiwiSaver scheme will be relieved their savings aren’t going to be reduced by new taxes.
What is not so well known is that the report also recommends a number of other investor-friendly tax changes for people in KiwiSaver, and the government has committed to doing further work on those possible benefits. These include:
• Eliminating tax from employer KiwiSaver contributions for lower-income employees
• Reducing the lower two tax rates applying in KiwiSaver funds by 5 per cent each
• Increasing the government contribution (formerly a member tax credit)
• Continuing the government contribution for KiwiSaver savers on parental leave.
Tax on employer contributions
When you make a contribution to your KiwiSaver account, your employer also makes a contribution, usually 3 per cent. Your employee contributions are made out of your after-tax income. The contributions your employer makes are also subject to a special tax called Employer Superannuation Contribution Tax (ESCT).
This is so that there is no tax difference to you whether your employer increases your salary or wages, or paying a contribution to your KiwiSaver.
Given the low levels of saving by low-income earners, the Working Group recommends encouraging savings by removing the impact of ESCT for employees whose income is up to NZ$48,000, and potentially also providing a reducing benefit for those with incomes up to NZ$70,000.
To ease the compliance burden on employers, they continue to deduct ESCT, then for those who qualify IRD automatically refunds the benefit into their KiwiSaver account.
Reducing PIR tax rates
The lower Prescribed Investor Rate (PIR) for KiwiSaver investors are currently 17.5 and 10.5 per cent. The 10.5 per cent rate applies if your direct taxable income is NZ$14,000 or less and your combined taxable income and income from PIE funds (including KiwiSaver) is NZ$48,000 or less.
The 17.5 per cent rate applies for taxable income of NZ$48,000 and below and combined income of NZ$70,000 or below.
The Working Group recommends reducing these two lower rates only in the case of KiwiSaver funds by 5 per cent each to 12.5 per cent and 5.5 per cent.
This change would reduce the tax KiwiSaver mmebers pay in each PIR bracket by a maximum of NZ$3,500 and NZ$2,400 per year respectively.
Each KiwiSaver member gets a tax credit each year into their fund, called a government contribution. This is currently 50 cents per NZ$1 of contribution, capped once contributions reach NZ$1,042 per year.
The group recommends increasing this to 75 cents per NZ$1 of contribution, an increase of NZ$260 per year for those contributing NZ$1,042 or more each year.
The group also recommends continuing the government contribution for KiwiSaver members on parental leave. At the moment those on leave who are not earning are not entitled to the government contribution.
Every seven years the government reviews which fund managers can be KiwiSaver default providers. The last change occurred in 2014. The default providers will be reviewed again, starting this year, with any changes to default providers taking place in 2021.
The government will consider these KiwiSaver tax changes as part of the new KiwiSaver review. This means any changes might be announced next year as part of the election campaign process, to take effect from 1 April 2021.
If all the recommended measures are introduced, this would increase KiwiSaver balances by over NZ$4 billion over five years, almost 10 per cent of the total amount currently invested in KiwiSaver. That’s a significant new spend in the absence of a capital gains tax to raise new money on the other side.
Published 26 May 2019
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