Most of us take our tax affairs seriously and try not to get offside with the taxman. So why are so many New Zealanders on the wrong side of the tax ledger when it comes to their KiwiSaver accounts?
Recently the Inland Revenue Department revealed that 1.5 million KiwiSaver members have the wrong Prescribed Investor Rate (PIR). That is an astonishing number – nearly half of all KiwiSaver members are on the wrong PIR.
IRD says that 950,000 have paid too much tax and 550,000 have paid too little and will get a bill for the outstanding amount for the past year. These numbers could grow.
Let’s step back a moment to understand this. 12 years ago – when KiwiSaver was launched, people were perhaps invested in company super schemes or managed funds which they had been assisted into by financial advisors. They, in general, received good advice and information.
Since then, the success of KiwiSaver has turned more than half of all adult aged Kiwis into PIE investors. Some may be investing with little experience and knowledge. I would suggest that many may not even open the regular statements and notices they get in the mail from their KiwiSaver providers or the IRD. And, if they did, do they understand what their PIR is and how it impacts their retirement savings?
Unfortunately, the 950,000 who have over-paid tax will not get a refund from the IRD as current KiwiSaver legislation does not allow for refunds from PIE investments. The 550,000 who have underpaid – and I know of one who owes more than $700 – will have got a shock. They will have to pay this tax from their after-tax income – not from future KiwiSaver earnings.
As each day goes by, more KiwiSaver joiners could be entering the wrong PIR just because they don’t know what rate they should be on. So, what is to be done?
We could play the blame game: the IRD, KiwiSaver providers and KiwiSaver members would all be players in that game.
I do think that the letters that the IRD is currently sending will by itself help. Many recipients will contact their KiwiSaver providers and get on the right rate.
Beyond that, two things would be helpful: first, is a small legislative change to require employees that join via the default route to give their correct rates to their employer. The employer would then pass that on to the IRD as a part of the KiwiSaver process.
Second, IRD themselves admit to receiving $42 million in over-paid tax from KiwiSaver members. Why not divert a small proportion of that windfall into an education campaign? A full-scale public education campaign, driven by the IRD and www.sorted.org.nz would go a long way to explaining KiwiSaver tax to people.
KiwiSaver has improved financial literacy but tax has not been a part of that conversation.
With hundreds of thousands of people feeling the hurt, now would be a good time to put it at the centre of the discussion.
Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr. He is an Authorised Financial Adviser. More deatils here: www.martinhawes.com. This article is general in nature and not personalised advice.