The government has played this one all wrong. The New Zealand Herald reported today:
National Party leader Christopher Luxon says proposed new tax rules for KiwiSaver accounts "can't stand" and his party will push to stop the "retirement tax".
On the AM show this morning, Luxon said Kiwis will be angered by the plans to charge GST on fees paid on KiwiSaver accounts from April 2026, which could net the government millions of dollars a year in additional revenue.
"This is such a bad idea; a retirement tax when we're trying to encourage people into KiwiSaver doesn't make any sense," Luxon said.
"This can't stand, this is a really bad idea."...
National has started a petition on its website to stop the "KiwiSaver tax", Luxon told the AM show.
It's not a really bad idea. The core of the actual proposal doesn't intend to tax KiwiSaver or retirement savings, but that is its effect. As the article notes:
The proposed tax bill was introduced to parliament on Tuesday to change the way the tax is applied to service fees charged by managed funds, which currently are not subject to GST.
Excluding things from GST creates unnecessary distortions and incentives. If you doubt that, you really should read about the great Jaffa Cake controversy in the UK (or this post on whether snuggies are blankets, or clothes). So, aligning the rate of GST to be the same for all financial services makes sense. However, the government really should have seen the controversy coming. They were warned:
The Inland Revenue has calculated that the proposed change will add around $225 million a year to the government's tax revenues.
Financial agencies and GST experts have warned the tax will hit KiwiSaver balances hard and be passed on in the form of increased fees, while the opposition has described it as "yet another tax grab ... to fleece New Zealanders of their hard-earned cash".
The Financial Services Council of New Zealand (FSC) also described the changes proposed in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill as legislative "overreaches" and a "suboptimal outcome" in the middle of a cost-of-living crisis.
This whole thing strikes me as a huge missed opportunity. The government is due to receive a windfall of $225 million a year, which would have otherwise gone to taxpayers' KiwiSaver accounts. Why not take that $225 million, and route it directly into KiwiSaver? The government already provides a contribution of $521.43 for every taxpayer who saves at least $1042.86 per year. Why not simply increase the government contribution? There are 3.1 million people with KiwiSaver accounts. Assuming nearly all of them save the minimum, $225 million works out at about $75 per KiwiSaver account.
That sounds like an even better deal when you consider that:
Someone with $37,500 in a fund charging a 0.8 per cent fee would currently pay a $300 annual fee. Under the new rules, if the cost of the rule change were passed through to the investor, that fee would rise to $359, costing the investor $6490 over 25 years of contributions.
The average KiwiSaver balance for someone in their 40s is $37,000.
So, in effect, paying an additional contribution of $75 per year would make someone with the average KiwiSaver balance better off, on net (because the extra GST they would be paying is only $59, but they would gain $75 in additional government contribution, making them $16 better off per year). People with smaller KiwiSaver balances, who would be pay less than $59 extra in GST on their fees, would be even better off (because they would still receive $75 additional government contribution). People with larger KiwiSaver balances would end up paying more in additional GST than the $75 additional government contribution, making them somewhat worse off. This would, in effect, lead to a small redistribution of retirement wealth from taxpayers with large KiwiSaver balances to those with smaller KiwiSaver balances.
The effect wouldn't be large. But, when people are already worried about a KiwiSaver inequality gap, this would be a low-cost way of reducing that gap to some extent. The government is claiming that the GST change is not a money grab, but when they miss an obvious opportunity to leverage the tax change for redistribution, can you really blame people for thinking otherwise?
And then while I was writing this post, I saw the headline that the government has backtracked and withdrawn the tax change proposal. It's still a missed opportunity.
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