It is time for New Zealanders to demand changes to the
tax treatment of their savings, Dunedin superannuation
specialist Rhodes Donald says.
Politicians would only make changes if they had to, Mr
Donald, of Polson Higgs, said.
''It is up to voters to understand the magnitude of the
problem, see the anomalies and demand something be done about
The tax work published by the Financial Savings Council made
a timely contribution to the understanding the magnitude of
the problem. It was now time to make the issues
understandable, describe the injustices and force change, he
''The key issue for us now is how to make the material
understandable for the average punter. In a nutshell, the
council is saying we have the tax treatment for KiwiSaver all
wrong because we tax the compound returns earned every day
along the way.''
Over a long period of saving, typically up to 50 years, the
impact of taxing the returns on a daily basis rather than not
taxing them reduced the amount available by nearly 60%, Mr
The impact had been recognised by other countries such as the
United Kingdom, the United States and Australia where there
were tax concessions within retirement savings schemes and
funds were locked in until retirement.
With KiwiSaver, New Zealanders saved with taxed money (T),
the returns within the KiwiSaver funds were taxed (also T)
while the withdrawals at retirement were exempt from tax (E).
In the older, more mature retirement jurisdictions like the
UK, Australia and the US, they used a combination of TET, or
EET, he said.
Retirees in those other countries ended up with a lot more
money saved for their retirement as a result of reducing or
eliminating the tax on the compounding returns within their
retirement funds during the savings phase.
A typical saver in those countries would be way ahead of New
Zealand, even after paying tax on their withdrawals, he said.
According to the tax analysis by the Financial Services
Council, KiwiSaver schemes in New Zealand had it wrong as TTE
schemes because the most important component of the end
result, the compounding returns, were being over-taxed. That
was also true of bank term deposits and diversified
portfolios, also used to fund retirement savings.
''We all know that somehow investors in rental properties get
a tax break investors in other types of investments don't.
The council tax paper is very clear on the huge tax subsidy
going to not just investors in rental properties but all we
homeowners, as well.''
Tax experts calculated the tax subsidy going to homeowners
paying off their ''super-sized'' mortgages, compared with an
investment in a bank term deposit or a diversified portfolio,
amounted to $4 billion a year, Mr Donald said. That was twice
the amount going on social welfare payments to lower income
earners for their housing.
The council's tax paper assumed taxing the family home was
politically impossible so they dropped it. At the same time,
the council admitted the anomaly distorted the New Zealand
economy by encouraging people to overspend on housing,
usually with money borrowed overseas.
In turn, interest rates were driven higher and New Zealanders
had less money to spend on other more productive items such
as education, health, science and business development.
''We suffer as a nation and will continue to suffer until
someone with enough courage confronts the issue head on with
a comprehensive capital gains tax, without exemptions. No-one
is holding their breath.''
It was estimated 60% of household wealth in New Zealand was
tied up in housing, which he said was dead money.
New Zealand Property Investors Federation president Andrew
King took issue with the Financial Service Council's claim on
Traders in property were taxed on their capital profits,
while fund managers were not, he said.
Higher income earners were taxed 33% on their rental income
rather than the 28% rate for fund managers and unlike the
fund management industry, property investment did not receive
taxpayer funds to enhance the returns it provided.
''Unlike New Zealanders using fund managers, property
investors do not have to pay around 1% of their investment to
the manager regardless of whether a profit is made or not.''
Property investors did not receive government money to help
pay for property management, yet the Government gave up to
$500 for each KiwiSaver account every year as a contribution
towards their fund management fees, Mr King said.
''It's clear rental property does not have a tax advantage
over managed funds, so I guess the Financial Services Council
must want a lower tax rate because they simply can't compete
with property investment returns.
''Perhaps they should lower their fees or just get a better
return for their clients, rather than attacking an industry
that is simply outperforming them,'' he said.