David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: KiwiSaver tax grabs off the table

Photo / Neville Marriner
Photo / Neville Marriner

In his pre-Budget teaser speech Prime Minister John Key made the somewhat redundant pledge that there "will be no changes, however, to... KiwiSaver tax credits".

As the tax advantages of KiwiSaver have already been pared down to a marginal level, any further claw-back would bring the scheme's incentive value close enough to zero.

While the halving of the KiwiSaver tax credit from $1043 to $521 (approx) was the most visible reduction, the removal of the tax exemption for the employer contribution, which came into force this April, has a more subtle but nonetheless significant effect.

By my calculations, assuming the employer makes a 2 per cent contribution to match the employees' (after tax) 2 per cent, for someone on $50,000 a year the new KiwiSaver contribution tax will deduct $300 - leaving a net gain from the KiwiSaver tax credit of $221.

As income hits about $90,000 the value of the KiwiSaver tax credit gets wiped out completely by the new employer contributions tax.

With employer KiwiSaver contributions set to increase to 6 per cent from next tax year, split evenly between employee and employer, the relative value of the tax credit will diminish further (and degrade even more over time as it is not inflation-indexed).

Most employees, however, probably won't even notice the post-tax reduction in their KiwiSaver contributions due to irregular reporting and general apathy. And for many the scheme remains a decent savings vehicle in that;

Employees need to join KiwiSaver to get the compulsory employer contributions (albeit that these are probably foregone wage increases);

It imposes an easy savings discipline.

From a government perspective, however, the new employer contributions impost leaves the system just about tax neutral, excluding the $1,000 kickstart payment.

Compared to the Australian superannuation system, even the original KiwiSaver tax incentives looked anaemic, now the contrast is startling.

But Australia, too, is looking to rein in its super tax generosity. Wayne Swann, Australian Treasurer, will reportedly claw back about A$1 billion in super tax concessions to the super rich in his upcoming budget, an option Bill English no longer has.

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David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. He is the editor of industry website Investment News. David has edited magazines and websites for the financial advice, investment and superannuation industries.

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