KiwiSaver members could be significantly better off if New Zealand adopted a taxation model similar to Australia’s, an economist says.
Simplicity chief economist Shamubeel Eaqub ran some numbers modelling a system similar to Australia’s, where contributions and returns are taxed at 15%.
In New Zealand, full tax is paid on income contributed to KiwiSaver, and returns in PIE schemes taxed at an investor’s prescribed investor rate up to 28%.
Eaqub said an “average” KiwiSaver investor starting now could end up $60,000 better off in nominal terms at retirement on a model similar to Australia’s. If tax was not paid on contributions or returns, they could be about $1 million better off – and if only taxes on returns were removed the gain would be about $300,000.
“In Australia, the context is there’s some conversation about whether the tax breaks are too generous for richer people. It’s not that it’s perfect but the point is in other countries it’s heavily incentivised for people to save in their private pension.”
But it was not in New Zealand.
Kirk Hope, chief executive of the Financial Services Council, which represents KiwiSaver providers, said the Australian model was different because that country has a means-tested pension.
“The tax break that occurs in New Zealand occurs when you retire, when you get national super… that is the equivalent of about $500,000. So I think it’s hard to do a comparative analysis without acknowledging that there are significant differences between the schemes and what they are trying to achieve.”
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But he said if the tax on savings for New Zealanders was reduced it would give future governments more “fiscal options” in relation to superannuation.
He said New Zealand previously had a system that was EET — or exempt, exempt, taxed, where contributions were tax-exempt, exempt from tax within the scheme and then fully taxed when withdrawn.
The Tax Working Group in 2018 acknowledged that the change from that system had potentially created incentives for New Zealanders to direct savings into investments like houses instead.
Hope said it would be expensive to adjust back to EET but there could be other changes that would be more affordable.
The tax working group estimated that ignoring behavioural changes, it would cost $200m to $300m a year to move to a system where returns and withdrawals were not taxed, and $2.5b a year to move to an EET system.
“The higher initial cost for an EET regime arises from the fact that there will be a substantial deferral period before significant amounts are withdrawn from the scheme, and thus taxed under the third ‘t’. Although these are very different initial costs, the costs will be the same in the long run on a net present value basis.”
Hope said providing different forms of tax incentives would be beneficial for savers.
He said removing or reducing the employer contribution tax would be particularly useful for low-income people.
Kernel Wealth founder Dean Anderson said New Zealand was one of the few countries operating a TTE — taxed contributions, taxed returns and exempt withdrawal — model.
“Our future savings would be much better off under an EET approach, where we don’t pay tax on the way in but on the way out.
“With low savings rates in NZ, the government should be exploring everything in its powers to grow savings rates, which benefits NZ and Kiwis over the long term.
“But it’s not a surprise. The recent meek KiwiSaver policy announcement did all the hard work to announce a positive gradual increase to KiwiSaver contributions, yet they fell short by announcing a three-year policy rather than outlining a decade plus long policy of incremental KiwiSaver increases.”
Ana-Marie Lockyer, chief executive at Pie Funds, said KiwiSaver members were at a disadvantage compared to Australians because there was no upfront tax incentive or concession as in Australia to encourage them to contribute more.
“Maybe consideration of a mid-tier flat tax rate on savings up to a certain amount would encourage savings.”
She said employer contributions were also taxed so investors lost the benefits of compounding, and investors paid tax on bonds and deemed dividends on global equities so they were effectively paying a capital gains tax.
“So contrary to the government’s stated goal of helping New Zealanders’ grow their KiwiSaver balances, these factors mean New Zealanders have less incentives to make voluntary contributions and pay more tax on investment earnings, resulting in smaller balances at retirement relative to our Australian friends.”
rnz.co.nz
