The NZ Superannuation Fund (NZS) could soon achieve a long-cherished dream of tax-free status after the government formally put the concept on its to-do list last week.
In a release last week, Revenue Minister Simon Watts noted that the National-led administration’s new Tax and Social Policy Work Programme would consider “whether the New Zealand Superannuation Fund should be exempt from paying income tax, which could free up more funds for retirement savings”.
NZS has regularly argued for the government to remove its domestic tax obligations on investment returns that have applied since inception in 2003.
Reprising the issue in a briefing to the incoming minister last December, the sovereign wealth fund said moving to a tax-free setting “would reduce deadweight loss, improve efficiency, and be at worst fiscally neutral”.
“The NZ Super Fund’s assets are included on the Crown’s balance sheet,” the December briefing says. “As a result, Crown contributions do not increase government debt, nor does tax paid by the NZ Super Fund increase government revenue or assets.”
But the annual tax impost, which has varied wildly from year-to-year, does bring administrative complications and potential extra costs for the sovereign wealth fund.
For example, meeting large tax obligations – such as its $2.2 billion payment for the 2020/21 fiscal year – could force NZ Super to “liquidate long-term assets and positions”.
“As a result of transaction and opportunity costs this activity represents an unnecessary fiscal cost.”
The briefing also highlights its domestic taxpayer status can have a knock-on effect in some offshore countries by making it “more difficult to argue the principle of sovereign immunity”.
Furthermore, NZ Super says its current tax treatment is “almost unique globally in terms of sovereign wealth funds” while also inconsistent with the tax-exempt fellow Crown investment vehicles such as the ACC fund and iwi investors.
“The main argument which has been made against giving the NZ Super Fund tax exempt status is that the payment of domestic tax by the Fund creates greater flexibility for the Government to manage, and adjust, its future fiscal position,” the briefing says.
However, if the government does remove the fund’s tax-paying duties, Treasury would likely adjust the NZ Super contribution formula to even the fiscal balance.
And the briefing points out another lurk in the current arrangements that require the fund to keep paying tax even if the government suspends contributions,
“We note that the levying of domestic tax during periods when contributions are suspended effectively constitutes a withdrawal from the Fund i.e. the effect of the suspension is not just that contributions are halted, but that through tax payments continuing, funds that were ring-fenced for future universal superannuation payments are diverted to other, short-term purposes,” the ministerial brief says. “While this is technically possible, it is inconsistent with the inter-generational purpose of the Fund and with the express intent of the Act.”
In 2009 the-then National Finance Minister, Bill English, suspended contributions to NZ Super in the wake of the global financial crisis with payments restarting nine years later under a newly elected Labour-led government.
Among other priorities, the Watts-approved revenue works program includes releasing offshore pension funds from locked-in KiwiSaver accounts, introducing crypto-asset reporting framework and reviewing the foreign investment fund (or FIF) rules.