David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: Capital punishment relief can ease pain for KiwiSavers

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Photo / Thinkstock

Lobby group for the big end of money town, the Financial Services Council (FSC), has reiterated its call for preferential KiwiSaver tax rates, describing the current regime as "most punitive tax regime for retirement saving that we have been able to find in the developed world".

I argued previously that the FSC's proposal was regressive and that the existing $521 annual government top-up (known as the Member Tax Credit) was a better deal for most members right now.

In its summary, the FSC addresses some of those equity issues.

"If the concern is that high income earners will save excessively close to retirement [to take advantage of lower KiwiSaver tax rates] it is possible to cap the annual level of contributions that can be saved without adversely effecting access for lower income KiwiSavers," the FSC says.

This proposal, similar to the Australian superannuation contribution cap rules, is certainly feasible but - as the experience in Australia has shown - it can be complex to administer and also subject to political moods.

However, the FSC does concede that its proposal for preferential KiwiSaver Prescribed Investor Rates (PIR) is "but one possible way of reducing the amount lower income earners need to save to fund a comfortable retirement".

Indeed, the FSC, via a report it commissioned from economic analyst firm Infometrics, models a few scenarios.

The Infometrics report calculates effective tax rates for KiwiSaver members in a complicated way but it more or less adds an individual's marginal tax rate (because KiwiSaver contributions are after tax) to their PIR. Infometrics comes up with a range of effective KiwiSaver tax rates from 55.5 per cent, for top-earners, to 26.1 per cent for those on the minimum wage.

The reality is somewhat different. Even if you deem the existing incentive for high-income earners to invest in KiwiSaver (where returns are taxed at 28 per cent compared to the 33 per cent marginal rate) as trivial, there are, in fact, already a number of tax lurks under the bonnet. Admittedly, these lurks also apply to all Portfolio Investment Entities (PIE), of which KiwiSaver schemes are a subset.

Capital gains in most Australasian equities, for example, are tax-free in KiwiSaver PIE funds. Likewise, global equities are taxed on an assumed 5 per cent annual return, which in a good year, like last year, can result in a substantial tax-free investment filip (ignoring the flipside that the same rule can see investors being taxed on a loss).

Where KiwiSaver funds are invested, of course, can make a big difference to tax.
The Financial Markets Authority (FMA) KiwiSaver report for the 12 months to March 2013 provides a picture of the overall tax paid by members.

According to the FMA figures, the default KiwiSaver scheme sector (constrained to a maximum 25 per cent allocation to shares) paid about $33.67 million in tax on earnings of $230.7 million - or about 14.6 per cent.

Non-default KiwiSaver schemes (which have a higher allocation to shares in general), meanwhile, shelled out $101.6 million in tax on investment returns of $1.3 billion, equating to a tax rate of 7.7 per cent.

For the 12-month period all KiwiSaver schemes paid total tax of roughly $135 million on investment earnings of just over $1.5 billion - or an aggregate tax rate of 8.8 per cent.

Over the same timeframe, investment management and administration fees totaled close to $165 million, equivalent to a punishing 10.7 per cent of investment earnings.

- NZ Herald

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. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

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