A campaign claiming KiwiSaver members are being overtaxed does not "stand up to scrutiny" and changing the way the retirement scheme is taxed would create more inequities, according to a top law firm.

KiwiSaver industry group the Financial Services Council this week launched a bid to change what it claims is the over-taxation of savings.

Backed by Age Concern, Consumer New Zealand and the Taxpayers' Union the group is arguing that for every dollar of tax collected on the earnings someone's savings generate while entrusted to fund managers is a dollar less reinvested to generate compound interest for the saver.

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Campaign to reduce tax on savings


The cumulative effect - depending on how long people save and their marginal tax rate - can be effective tax rates much higher than they pay on other income.

FSC chief executive Peter Neilson said that meant someone in the 33 per cent tax bracket would lose 54.7 per cent of their KiwiSaver earnings to tax over 40 years.

And someone in KiwiSaver on the average wage saving a typical 6 per cent of income for 40 years would have a nest egg more than $100,000 larger if the over-taxation was fixed.

But lawyers for Chapman Tripp said that while there was a case for claiming over-taxation on interest income for investors in products such as bank deposits and corporate bonds the KiwiSaver claim was more about a push for a tax subsidy for the retirement savings scheme.

People in KiwiSaver currently pay tax as money is earned by the KiwiSaver fund at a rate depending on their personal income.

Top tax rate payers already get a concession as those who pay a 33 per cent tax on their income only face a top tax rate of 28 per cent for KiwiSaver.

Chapman Tripp said in a note that taxing KiwiSaver savings on withdrawal for retirement rather than as income was earned would boost the amount of money invested for savers.

But taxing the money only on withdrawal would lower the Government's tax take and give KiwiSaver an advantage over direct investment.

"This would provide such a significant tax benefit to investment through KiwiSaver that New Zealand, like other jurisdictions, would presumably have to introduce "reasonable benefit" rules to restrict the amount that could be invested each year into KiwiSaver.

"It would also create pressure for some kind of deferral or reduction of the very large tax cost that would arise on withdrawal.

"And of course the reduction in tax would need to be funded by changes elsewhere in the system."

However the law firm said the second proposal to inflation adjust the tax paid on interest had merit.

Some Scandinavian countries already did this and while it would pose some challenges the idea deserved debate and serious consideration by the government.

Read Chapman Tripp's full analysis here.