By Andrew Gawith
Many tens of thousands of New Zealanders work in Australia. They are required to pay tax and also to have a superannuation account into which their employer must make generous contributions.
A significant proportion of these Kiwis have returned home over the years and have therefore left behind small and not so small amounts of retirement savings in one or more superannuation schemes.
It's difficult to know the aggregate value of these accounts, but One Path recently estimated resident New Zealanders could have around NZ$5 billion in Australian super accounts - that seems a reasonable guess. To put that in perspective there's now around NZ$9 billion in KiwiSaver.
While the two governments have agreed to allow people to transfer their retirement savings accounts between the two countries, Australia has yet to pass the required legislation - New Zealand is good to go. Australia has indicated that the legislation should be in place by the end of this year but it's hardly a high priority for them given their potential net loss of funds.
It looks like a possible windfall for KiwiSaver providers and the country as New Zealanders consolidate their retirement savings in their KiwiSaver accounts. But it's by no means a sure bet that New Zealanders will see it as a smart thing to do and it may raise some awkward questions for the government here.
The most obvious stumbling block is the lower tax rate applied to superannuation savings in Australia. The current rate applied to taxable income on savings there is 15 per cent, although where contact details are missing or no personal information is available the tax rate can be significantly higher. That compares to 28 per cent (assuming that the KiwiSaver scheme is a PIE) for those on the top tax rate here and 17.5 per cent for most others (low income earners pay tax 10.5 per cent).
Now tax is a complex issue at the best of times and tax on investment returns is among the most complex of tax regimes, so the net impact of tax in the two countries may not be as stark as these numbers imply, but there's no doubt Australia treats its savers more favourably when it comes to tax than New Zealand does.
That raises an interesting question in light of the budget changes to KiwiSaver. The Key government reduced the incentives by halving its matching contribution (misleadingly called a member tax credit) and removing the tax exemption for compulsory employer contributions.
The argument was that the government needed to reduce the cost of KiwiSaver, but it would be interesting to see some analysis of the cost to the respective governments of KiwiSaver versus Australia's compulsory superannuation - I suspect it would show we have the cheaper retirement savings scheme.
For small amounts consolidation is likely to be a sensible decision despite the more favourable tax treatment in Australia. Small, dormant accounts that may be spread over several superannuation funds and managers, and where contact details are not kept up-to-date can easily go missing - gone no address.
Consolidating into one KiwiSaver account (you can be a member of only one KiwiSaver scheme at a time) makes it easier to keep track of the funds and KiwiSaver also has a convenient tracking device: if you and your provider have lost contact with one another you can always fill out a transfer form to any KiwiSaver scheme and IRD will identify your existing provider for you - funds found!
Fees are another factor for Kiwis to take into account when considering whether to consolidate their Australian super funds in their KiwiSaver account.
Low account balances tend to incur high percentage fees given the common practice of charging a fixed administration fee that in many Australian schemes is between $50 and $100 a year. In Australia if you shifted jobs you will have a series of super accounts all with relatively low account balances. Total fees in each of these accounts could easily be over 2 per cent a year.
Consolidating these accounts in one KiwiSaver scheme is likely to drop annual fees to more like 1 per cent - KiwiSaver schemes generally have comparable or lower fees than many Australian super schemes, especially for smaller account balances.
The prospect of making retirement savings completely transportable between Australia and New Zealand is logical and could be a major bonus for us given the potentially significant capital transfer as people who have worked in Australia consolidate their retirement savings, despite more favourable tax treatment of retirement savings in Australia. But that bonus could be accompanied by greater pressure on the New Zealand government to align KiwiSaver with the Australian scheme - compulsion, more consistent tax treatment, means testing of New Zealand Super?
Andrew Gawith is a director at Gareth Morgan Investments
This article was first published in the NZ Herald.