Why your Kiwisaver tax rate could be too high

Photo / The Aucklander

As I  lamented recently, the KiwiSaver system is full of interesting administrative quirks.

And another one has come to my attention this week that could see members paying over a third as much tax as they have to. Under the KiwiSaver rules (and the associated Portfolio Investment Entity - or PIE - regime) have to nominate the rate their investments will be taxed at. Currently, KiwiSaver members can select a Prescribed Investor Rate (PIR) of either 19.5 per cent or 30 per cent depending on income levels.

If your income changes, it is up to the individual to notify the KiwiSaver provider about any adjustment to their PIR (the IRD has some useful explanations of the PIR process).

According to a tax lawyer I spoke to this week, KiwiSaver providers are also required to prompt their members to review PIRs each year. But at least one provider has interpreted this requirement very conservatively and will automatically reset 19.5 per cent PIR members up to 30 per cent at the beginning of each tax year unless it is notified that the lower tax rate still applies.

As Mercer explains in a member statement passed on to me: "By law, if you are eligible for the lower (19.5 per cent) tax rate you need to let Mercer know each year, otherwise the default tax rate of 30 per cent will apply."

A couple of KiwiSaver experts I spoke to described the Mercer approach to PIR resets as "unusual" and it may indeed be the only provider to adopt this method. However, with 60,000 plus members enrolled in the Mercer KiwiSaver scheme - most of these through the default fund - there's plenty of potential for members to be inappropriately bumped up to the 30 per cent tax rate without their knowledge.

In its member statements Mercer doesn't make a big deal of the PIR reset - it's explained in the fineprint - but it should. I would bet most KiwiSaver members - Mercer or otherwise - haven't read their statements that closely.

But if your PIR has jumped to 30 per cent when it should be 19.5 per cent you will not receive any tax overpayment back from the IRD or Mercer (on the other hand the IRD would chase you for any underpayment) so READ YOUR STATEMENT.

This warning also applies to KiwiSaver members who signed up through KiwiBank, which distributes the Mercer scheme under the bank brand. That relationship will officially come to an end this week - but the PIR problem may persist.


David Chaplin