Veteran NZ investment consultant, Jonathan Eriksen, is advocating for a back-to-the-future superannuation tax change that could see investment returns increase by almost a third.
In a note included with the latest EriksensGlobal superannuation master trust quarterly report, he called for the reversal of an investment “tax change made in December 1987 and switch from TTE (taxed contributions, taxed investment income and tax free benefits) back to EET (exempt, exempt, taxed benefits)”.
“This would dramatically grow our retirement savings and investment pool, help pay for much needed infrastructure projects and grow the investment earnings and compounding by 30%,” Eriksen said.
Under the current system, KiwiSaver and superannuation contributions are taxed at marginal rates of up to 39 per cent.
Meanwhile, investment returns are either taxed at marginal rates or a maximum 28 per cent if held in portfolio investment entity (PIE) structures.
Exempting investment returns inside locked-in retirement funds such as KiwiSaver might not be too painful for government in the short-term at least.
Over the 12 months to March 31, the Inland Revenue Department collected about $590 million in tax from KiwiSaver investment returns: during the same period member tax credits cost the government just under $1 billion.
But giving a tax-free discount to mandatory KiwiSaver employee and employer contributions (equating to a combined 6 per cent of income) would be a harder fiscal pill to swallow.
Eriksen admitted that while the government would have to make difficult trade-offs to implement an EET-style system – especially amid a cost-saving drive – the long-term benefits would be considerable.
Furthermore, he said improving retirement savings at the front-end via tax relief might be an easier sell than bumping up employer and employee contribution rates during a cost-of-living crisis.
Last month the Retirement Commissioner, Jane Wrightson, reiterated her call to increase the baseline KiwiSaver contribution rate.
Wrightson said while KiwiSaver had “become instrumental in encouraging retirement savings, New Zealanders – and their employers – are simply not contributing enough”.
“We could improve this with a higher default contribution rate and look at increasing the government contribution for those who do not benefit from employer matching, like the self-employed,” she said.
“It’s a bit salutary that Australian employers contribute 12% to employees’ pension pots. The consequent size of those individual pots is one reason why Australia can means test its public pension.”
Under the Australian compulsory super rules, mandatory employer contributions have ratcheted up from an original 3 per cent of income in 1993 to the current 11.5 per cent (and moving to the final destination of 12 per cent next July).
The so-called Superannuation Guarantee includes a significant tax discount on contributions and investment returns (set at 15 per cent for both) and exempt pension accounts – DDE? – albeit governed by complex threshold and other administrative rules.