IRD says it will take action to stop KiwiSaver over-taxing

The Government was warned a year ago about the over-taxing of KiwiSaver members. Photo / Kenny Rodger

The Inland Revenue says it is working on changes that would allow it to tell KiwiSaver providers directly if their members are on the wrong tax rate.

But the move will come too late for those who are estimated to have lost a collective $70 million in overpayments to the tax department.

This week it emerged 450,000 people have been paying the wrong prescribed investor rate on their portfolio investment entity (PIE) investments which include KiwiSaver.

The Inland Revenue has sent 120,000 letters to people advising them of the issue.

Some will have a tax bill to pay as a result but the majority are believed to have overpaid tax - and the tax rules on KiwiSaver funds means unlike income tax the money does not have to be paid back.

Inland Revenue cannot say how many people had overpaid tax. Photo / File

A spokeswoman for Inland Revenue said it could not give the details at this stage as to how many of the 450,000 had overpaid tax.

She would not give a reason why.

The number of people on the wrong PIR rate emerged after the Inland Revenue overhauled its system in April.

But a group of financial advisers warned the Government of the issue a year ago.

Nine financial advisers wrote an open letter to the head of the Financial Markets Authority Rob Everett, Reserve Bank Governor Adrian Orr, Finance Minister Grant Robertson and Commerce Minister Kris Faafoi saying that many of the lowest income earning KiwiSaver members were paying tax at the highest possible rate of 28 per cent when they should have been taxed at 10.5 per cent or 17.5 per cent.

They estimated for the six years ended 2018 that KiwiSaver members had overpaid tax by more than $70m.

At the time of the letter from the financial advisers, Robertson's office acknowledged it had received the letter but said minister Faafoi would be responding to it.

In a letter dated June 8, 2018, Faafoi said issues about the prescribed investor rate did not fall within his portfolio but he had raised concerns with the tax department.

"I have raised your concerns with Inland Revenue officials for them to consider whether it would be possible to make further enhancements to the process for providing PIRs [prescribed investor rates] to scheme providers."

A year later, changes have yet to be made but Inland Revenue says it is taking action.

An IRD spokeswoman said: "Officials have been working on changes that would allow Inland Revenue to contact PIE investment providers directly if people are on the wrong Prescribed Investor Rate." She said Minister of Revenue Stuart Nash had been talking with officials about possible improvements.

"Currently, it is the responsibility of individuals to give their KiwiSaver providers their correct PIR."

"Inland Revenue's new IT systems are better able to identify who might be on the wrong PIR. We're now contacting people the system has already identified as being on the wrong rate to help each one get on the right PIR for them."

Minister of Revenue Stuart Nash has been talking with officials about possible improvements. Photo / File

A spokeswoman for Nash said it was aware of the issue and was talking to officials. But she did not answer questions on why it had taken a year for the Government to act.

John Cliffe, one of the advisers behind the open letter, said the issue was not new and had been around since the launch of KiwiSaver in July 2007.

"The IRD haven't done anything about this for years. They are culpably failing taxpayers."

Cliffe said the IRD was blaming the system but he called that out as a weak excuse.

He said the people who were missing out were the poorest New Zealanders. Those mostly likely to be overpaying tax on KiwiSaver were those who had been defaulted into the scheme and earned under $48k.

Rachelle Bland, another financial adviser who signed the open letter, has gone a step further and has launched a petition in Parliament asking the Government to stop taxing auto-enrolled KiwiSaver members at the highest tax rate by default.

She wants the KiwiSaver Act amended so when a person is auto-enrolled into KiwiSaver or starts new employment they can provide their employer notice of the prescribed investor rate.

The change would also place an annual obligation on the IRD to notify all providers what members' PIRs should be.

So far the petition has 112 signatures. It is open until August 31.

Bland wrote to 26 KiwiSaver providers last month asking for their help with the petition but just seven have responded.

She said it had been difficult to get through to the providers despite it being in the best interests of their members to act on the issue.

The IRD haven't done anything about this for years. They are culpably failing taxpayers.

John Cliffe

Bland said it was unfair to expect people straight out of school in their first job to understand what prescribed investor rate they should be on.

She said the KiwiSaver information pack given to new employees implied that there was nothing else they needed to do once signed up to KiwiSaver.

But after three months they needed to contact their provider and let them know what PIR rate they should be on.

The challenge was that often providers didn't have enough contact details for people or young people didn't read emails.

"They are not engaged. Often it is their first financial asset."

She said there was no reason why an employer couldn't collect the PIR or why the IRD could not confirm it on an annual basis.

"The IRD is all-knowing when it comes to legally earned income."

Tom Hartmann, at the Commission for Financial Capability, said he did not believe anyone had dropped the ball on the KiwiSaver tax front, it was just the way the system was set up at the time.

But he said now it needed to be fixed and the law should be changed to enable the overpayment of tax to be refunded.

"It think it is really unfair this is not refundable and can't be claimed back."

He said it was not just the tax money that was at issue but the lost returns on the money which could have a big impact on a person's future wellbeing.

Hartmann said making it refundable could require a legislative fix.

"It might be time for the Government to step in and make it right here."