Over 500,000 middle-bracket New Zealanders could be short-changed if the government adopts some of the KiwiSaver recommendations included in the Tax Working Group (TWG) final report.
The TWG report recommends lowering the KiwiSaver prescribed investor rate (PIR) for the bottom two tax rates – 10.5 and 17.5 per cent – by 5 per cent to align with the current discount afforded to those on the top marginal income tax rate of 33 per cent.
Under the current portfolio investment entity (PIE) rules, which apply to KiwiSaver funds, the maximum PIR is 28 per cent.
According to Inland Revenue Department (IRD) figures, just over 500,000 Kiwis fall into the $48,000 to $70,000 income tier that attracts a 30 per cent marginal tax – and hence just a 2 per cent PIR discount.
The TWG plan would embed that inequity in KiwiSaver – giving the 5 per cent investment tax saving to both low and high-income earners but squeezing the middle harder.
Robin Oliver, who served on the TWG committee, agreed the KiwiSaver proposal did create an anomaly for those on the 30 per cent rate.
But Oliver said the PIR middle-earner snub was not a deliberate TWG strategy.
“As I recall the focus of the discussion was more about low-income earners,” he said. “We just didn’t turn our minds to [what it means for 30 per cent taxpayers].”
Oliver was one of the three rebel TWG members who declined to back the final report plan to implement a capital gains tax (CGT) across almost all assets.
Along with Kirk Hope, head of lobby group BusinessNZ, and Joanne Hodge, former Bell Gull tax partner, Oliver (who was previously IRD deputy commissioner policy) supported a much more limited CGT proposal targeting property investors.
The Sir Michael Cullen-led TWG recommended four KiwiSaver tax amendments including: lowering the two lower PIRs by 5 per cent; cutting the employer superannuation contributions tax for KiwiSaver members earning up to $48,000 (and phasing out the rebate for incomes up to $70,000); allowing those on parental leave to receive the full annual member tax credit (MTC) regardless of contributions; and, raising the MTC from the current annual maximum of about $521 to $718.50.
“These measures would ensure that, as a group, people earning less than $70,000 per year would have improved KiwiSaver outcomes if the Government adopted the Group’s recommendations for extending capital gains taxation…,” Cullen said in a March statement.
“If all of the TWG’s proposed KiwiSaver measures are adopted… then KiwiSaver members earning over $70,000 would also, as a group, be better off.”
However, the some industry critics argued the TWG proposal would distort the current PIE regime in favour of KiwiSaver and create expensive administrative problems.
The government was due to report its preferred TWG policies early this month with any prospective changes set to come into force only if Labour retains power post the 2020 election.