By Amanda Morrall
National is being accused of taxation by "stealth" through proposed changes to KiwiSaver that will strip away incentives, incur added costs for small businesses and potentially do little to improve national savings.
Tax Agents' Institute member Terry Baucher says the net benefit to individual KiwiSavers -- as a result of reduced Government contributions and the imposition of tax on employer contributions -- is negligible, whereas National's amendments represents a "big pay day for the taxman.''
As part of an austerity programme meant to save NZ$2.6 billion over four years though KiwiSaver changes and Working For Families, Government announced in the May budget plans to halve the member tax credit on the national savings programme from a maximum of $1043 a year to $521 starting in July. See Bernard Hickey's article on why the KiwiSaver cuts were the wrong type of cuts.
Further to that, it has introduced a tax on employer contributions, which had been tax free.
The Tax Agents' Institute says the combined effect will be harsher than has been portrayed by Government.
Taking into account the 50% reduced member tax credit and tax on employer contributions, someone on a salary of NZ$50,000 (receiving a 3% employer contribution) will end up with NZ$258 from Government, almost half what they think they're getting from the maximum matching credits of NZ$521.
"So not only must an employer pay more for each employee, the employee actually gets less. It's smoke and mirrors in our opinion -- a `tax by stealth,'" said Baucher.
Wage earners making less will fare relatively better while higher income earners (those making NZ$84,000 a year or more) will be hit hardest as they'll be taxed on earnings at 33 cents on the dollar.
For example, an individual earning NZ$84,000 will end up paying NZ$310 in more in tax while someone earning NZ$40,000 will end up with a gain of $311 in Government contributions.
In rationalising the introduction of tax on employer contributions, National said 50% of the benefit of not having a tax was going to the top 15% of high income earners.
Starting next April, employers will be have to start applying the Employer Superannuation Contribution Tax (ESCT) -- which varies according to income.
|Income range||Tax rate|
|$0 - $16,800||10.5%|
|$16,801 - $57,600||17.5%|
|$57,601 - $84,000||30%|
|$84,001 and over||
Additionally, earnings on KiwiSaver investments get tax at the Prescribed Investment Rate, also tied to income. (See to more on PIR rates, click here).
New red tape, tensions
Apart from the tax pinch on investors, Baucher said the changes were also bad for ailing small businesses in New Zealand because of the necessary administrative adjustments, which he described as "costly, complex and expensive.''
In defense of its amendments to KiwiSaver, Government has argued that national savings rates will improve because of a requirement in 2013 for employees and employers to start paying 3% contributions, up from 2%.
While the extra contributions will over time compensate for the claw-back in tax credits by Government, Baucher suggests the restructuring will ultimately create greater employment tension, with employers offloading the expense on to employees during salary negotiations and review.
Wage bargaining would become increasingly intensified, as a result.
"If you're in one of those deals where the cost is loaded on to you, you might have to think very hard about it (KiwiSaver) as you'll suffer a double whammy."
Together with the added complexities for small business forced to comply with the changes, Baucher said the effect of the changes was questionable.
"Government says we want to encourage savings and reduce red tape but I can't in good conscience accept that this measure achieves either of those goals,'' he said.
"If you don't know how ESTC rates work you could be overpaying or under-paying."
Workplace Saving Chairman David Ireland said he believed the long-term effect of KiwiSaver was still positive.