Working group acknowledges few incentives to save

Requests for reinstatement of tax incentives on long-term saving have been heard by the tax working group pondering the future of New Zealand’s taxation system.

Thursday, September 20th 2018, 2:39PM

The Sir Michael Cullen-chaired group has today delivered its interim report.

During the submission process, many financial services sector submitters told the group that change was needed to encourage people to put their money into long-term savings schemes and other non-property investments.

At present, KiwiSaver contributions come from taxed income, and returns on the investments within the scheme are also taxed - creating a compounding tax effect.

The group acknowledged there were few incentives for retirement saving in the current model.

"KiwiSaver is targeted at providing greater proportionate benefits to those on lower incomes, but those on the bottom two marginal tax rate do not benefit from the fact that the top PIE rate is 28%," it said.

It said it had identified opportunities to encourage saving among low- and middle-income earners and make the treatment of retirement savings fairer.

“However, the treatment of retirement savings is interlinked with the treatment of capital income. The group will need to give further consideration to the choices and trade-offs around retirement savings in the final report.”

Possibilities included dropping the tax in employer contributions and lowering the PIE tax rate by five percentage points across all levels.

The group has still not made a firm recommendation on the possibility of a capital gains tax but seems to favour the idea of taxing capital gains on a much wider range of assets.

Cullen said extending the taxation of capital income would have a range of advantages and disadvantages. The group is still weighing up these issues, and will come back with firm recommendations in its final report in February.

“It will improve the fairness and integrity of the tax system; it will improve the sustainability of the revenue base; and it will level the playing field between different types of investments. Yet the options for extending capital income taxation can be complex, resulting in higher compliance and administration costs.

“We have made some good progress in setting out the main choices and options – but there is still a great deal of work to do. The group’s final report will provide full recommendations on all of the issues examined by the group, including the rates and thresholds for income tax.”

Fisher Funds chief executive Bruce McLachlan said his initial reaction was that such a change would be positive for investment markets.

“Put simply, the changes are likely to lead to a greater number of people saving through vehicles such as KiwiSaver and managed funds, and the savings they will have will be larger for the duration of their investment. More levelling of the tax playing field with property assets is also likely to see some rebalancing between asset classes towards other investments as well.

John Cuthbertson, New Zealand tax lead for Chartered Accountants Australia and New Zealand said there was a balance to strike.

"The design of a capital gains mechanism could ultimately decide winners and losers based on the form of ‘retirement saving’. Kiwis save for their retirement in many ways. Any taxes or concessions for retirement savings need to be fair to all forms of retirement savings. Picking winners by deciding which forms of savings are in, or out, of scope may create a dilemma for the Tax Working Group," he said.

"If the group decides to specifically exempt savings held in KiwiSaver, the incentive created needs to be acknowledged."

Tags: tax