Terry Baucher wonders if it is time to look again at the funding of superannuation and gathers some of the facts and figures

Terry Baucher wonders if it is time to look again at the funding of superannuation and gathers some of the facts and figures

By Terry Baucher*

In recent weeks both the Retirement Commissioner and Treasury have expressed concerns about the future affordability of New Zealand Superannuation. 

Will the tax system, particularly the present tax treatment of savings, need to change to meet those future demands?

“Unsustainable” is how Retirement Commissioner Diane Maxwell has described the current approach to funding New Zealand Superannuation during recent interviews that can be seen here, here and here.

Treasury’s statement on the Long-Term Fiscal Position wasn’t quite so blunt but observed:

“However, population ageing combined with the retirement of the baby boomer population cohort presents a challenge for governments unlike those faced in the past.”

The Retirement Commissioner has also suggested the Government should either resume contributions to the New Zealand Superannuation Fund (“the NZSF”) or stop taxing the fund:

See, to me, if you contribute, then tax; if you don’t contribute, don’t tax.” 

(Since the Government’s last contribution in 2009 the NZSF has paid more than $3 billion of income tax).

The NZSF is a “sovereign wealth fund” but virtually uniquely for such a fund, it’s subject to income tax.  (By contrast the Accident Compensation Corporation, the Earthquake Commission and the Reserve Bank of New Zealand are all exempt from income tax on their investment and trading activities). 

The tax rules applicable to the NZSF also apply to KiwiSaver funds and superannuation schemes.  In effect, vehicles designed to fund a future retirement are simultaneously required to contribute to the present through taxation of the very savings intended to provide for the future.  To understand why that happened we must look at the origins of the present retirement savings tax regime.

An overhaul

In the late 1980s, faced with the rising cost of tax breaks (estimated at $660 million for the year to June 1989), the Fourth Labour Government decided to overhaul the tax treatment of superannuation schemes.   The previous tax preferred “Exempt, Exempt, Tax” (EET) treatment was replaced by a “Tax, Tax, Exempt” (TTE) regime. From April 1990 contributions to superannuation schemes are made from after tax income. Employers are required to deduct what is now termed employer superannuation contribution tax (ESCT) from their contributions.  The income of superannuation schemes is taxable but withdrawals from schemes would be exempt from income tax. 

Apart from reducing the fiscal cost, the reforms of the tax system in the 1980s were built on the principle of broadening the tax base to lower tax rates, eliminating tax distortions and treating all forms of savings equally.  Unfortunately, the failure to follow through with comprehensive capital taxation left a huge distortion in the tax system in the form of a preference towards property and housing.

The flat tax rate of 33% applicable to superannuation schemes from 1990 made them less attractive to investors.  Furthermore, members with a personal tax rate below 33% were being over-taxed.  Consequently, the numbers of superannuation schemes and the amounts invested began to fall.   The trend was such the Reserve Bank discussed it in its September 1993 Bulletin.   

Falling scheme numbers

The Government Actuary’s Report on superannuation schemes for the year ended 30 June 2003 reported that between 31 December 1990 and 31 December 2002 the number of superannuation schemes fell from 2,863 to 727. Over the same period the percentage of the workforce who were members of a superannuation scheme dropped from 22.6% to 13.9%.  The Government Actuary described this trend as “quite striking” which is probably code for “that’s not good.”

Meantime the numbers of investors declaring residential property income began to rise.  The total of individuals, trusts, partnerships and companies (including LAQCs) returning residential rental income for the year ended 31 March 1997 was 138,000. By the year ended 31 March 2015 the total (including look-through companies) had doubled to just under 277,000.

The size and potential effect of this shift towards property investment was identified by the OECD in its November 2000 OECD economic survey of New Zealand.   The survey noted the lack of a comprehensive capital gains tax and the favourable tax treatment of owner-occupied housing.  The OECD concluded that New Zealand had a substantial over-investment in housing of maybe 1.5 times that of other major OECD countries.  The 2001 McLeod Tax Review estimated the value of this over-investment as $40 billion (in 2001 dollars).

In September 2004 then Reserve Bank governor Dr Alan Bollard remarked during a speech on the property sector:

“An increasing number of purchases appear to have been by those wishing to let the house on the rental market and expecting to make a capital gain. We lack comprehensive statistics on such activity in New Zealand, but our contacts in the banking sector confirm that a substantial part of the recent growth in housing credit has been for that purpose.”

The Reserve Bank estimated the household sector's net wealth to be about 3 times annual GDP at the end of 2003.   That trend has continued with one ANZ economist recently estimating New Zealand’s housing market to be worth 350% of GDP.

All of this led the Savings Working Group to conclude in paragraph 7.2.3 of its January 2011 final report:

“It is likely, therefore, that the structure of New Zealand’s tax system is more biased against saving than in comparable countries.  Further, with no capital gains tax, the New Zealand tax system is biased towards a large block of economic activity – property investment – that tends to be at the less productive end of the spectrum.”

The effect of the disparity in the tax treatment of property and other savings can be seen when comparing the estimated tax paid by residential property investors relative to the asset base with that paid by investors in KiwiSaver funds and superannuation schemes. 

According to the Financial Markets Authority’s (“FMA”) KiwiSaver annual report for 2015, KiwiSaver funds paid $223 million of tax for the year ended 31st March 2015.  The closing balance of KiwiSaver scheme assets as at 31st March 2015 was $28.474 billion.

Surveying the schemes

The FMA’s statistical survey of superannuation schemes as at 31st December 2014 recorded tax paid of $225 million for the year with a closing funds balance of $22.014 billion. 

(These numbers exclude the $1.14 billion ESCT paid by employers in respect of employer contributions made to KiwiSaver funds and superannuation schemes during the year ended 30th June 2015.)

Data supplied to me by Inland Revenue estimated the gross residential rental income returned for the year to 31st March 2015 to be $2,008 million. After deducting the $701 million of rental losses claimed in the period, the net rental income returned and taxed was $1,307 million.  Assuming a 33% rate for individuals and trusts and 28% for companies this implies a tax take of about $425 million, or roughly $33 million less than that relating to KiwiSaver funds and superannuation schemes. 

There aren’t any detailed figures available for the value of residential property investment but Inland Revenue figures supplied to the Victoria University of Wellington Tax Working Group in 2009 (see page 17) estimated its value at $200 billion.


On these figures, KiwiSaver funds and savers paid more than four times as much tax as residential property investors relative to the sums invested.   To borrow a phrase this is “unsustainable”.

As at 30 June 2015 there were almost 2.5 million KiwiSaver members or nearly ten times the number of property investors filing income tax returns.   If a government moves to auto-enrol all employees into KiwiSaver then the pressure to redress the tax distortion in favour of property will increase.  Why should KiwiSaver members be taxed on their locked-in savings whilst property investors’ capital gains remain largely tax-free?

How can that pressure be relieved?

An option

One option would be to reduce or eliminate the tax paid by KiwiSaver and Superannuation schemes (in effect adopt a TEE approach).  The Savings Working Group 2011 report noted:

“The most important tax from the saver’s point of view is tax on investment income…This has a far greater effect on retirement income than a tax on contributions or a tax on retirement income…New Zealand is virtually alone in using TTE in respect to income tax on retirement savings.”

Alternatively, or in conjunction with the above change, the tax base could be broadened to capture previously untaxed capital gains.  (Treasury favours such a change, Inland Revenue does not).

The Government has previously ruled out either increasing the age at which New Zealand Superannuation becomes available or changing the basis of index-linking. Both the Retirement Commissioner and Treasury consider this approach “unsustainable” long-term. The same conclusion applies to the current tax treatment of savings.  At some point, something will give and a far more unpalatable answer such as sharply increased tax rates, lower benefits, or both may result. Moving now to address the systemic issues must surely be the way ahead.


*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »

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Wow a billion dollars in ESCT.

When KiwiSaver was introduced, employer contributions were exempt from ESCT at or below the maximum rate. Perhaps the exemption can be reinstated once fiscal conditions allow.

Thanks Zoltuger,

The 2011 Savings Working Group did look at the question of incentives for savings (which is what an ESCT exemption would be) and concluded the rate of taxation of savings was far more material.

To put some numbers on the effect of applying ESCT to all contributions, according to the IRD's annual report the amount of ESCT collected in the year to 30 June 2013 was $907 million compared with $673 million for the prior year (taxing all contributions began on 1 April 2012), and $681 million for the year to 30 June 2011.

What is the scale of tax avoidance (legal or otherwise) by NZ based residents and foreign multinationals? If we had fair tax laws that treated all forms of income and wealth creation equally and then enforced them, how unaffordable would superannuation and a lot of other things be then?
If we moved our economy away from a low wage low productivity one to a high wage high productivity one that did not need extraordinarily high immigration to keep it going and reformed the hosing market to the point where houses cost 3.5 times the average wage, we would be able to significantly reduce the working for family and housing supplements. This would also release a huge amount of cash for superannuation and other purposes. An economy and society that looked like this would also have a lot less of the other social costs that go along with large numbers of people near the poverty line.

Hi Chris,

Thanks for your comment. I looked at the question of the tax gap in my last column http://www.interest.co.nz/opinion/84001/terry-baucher-mulls-hidden-econo... and although we don't know the scale of the tax gap it certainly would make a difference.

Thanks for that Terry
So if I understand that correctly then $3 - 11b is the govt's estimate of tax avoidance under the existing tax rules. Very crudely, if we say that the NZ population is 4.5 million and the average life expectancy is 82 then our current population between 65 and 67 is 109,000. These are the 109,000 people that everybody is saying should no longer receive Govt Super so that our problems would be solved. At $17,500/year each that they are currently paid, the total is $1.9b/yr. So on the governments own figures they are failing to collect far more tax than they would save by raising the retirement age to 67. If they made the tax system treat all forms of wealth creation and income equally and made multinational companies pay their fair share as well, then they would have the cash to do a lot more things than just fix the super problem.

Accordingly if any politician or bureaucrat is telling us that we need to raise the retirement age, what they are really telling us is that they would rather do that than put any meaningful effort into collecting the taxes under the existing laws or fix the inequities in the existing tax laws.


so IRD collect less in TAX from rental investors than they forgive , 701 mil against 425 million
its time that distortion was fixed

..and that doesn't include the avoidance..such as all the new carpet, dishwashers, lawnmowers, trailers and curtains that are purchased for the rental....only to wind up in the family home. Another eyes wide shut approach to government.

I'm picking you're not an accountant. The article states rental income was $2 billion. After deducting the $700 million of rental losses claimed in the period, the net rental income returned and taxed was $1.3 billion.

So that is $1.3 billion in taxable income with an estimated tax take of $425 million for the year ended 31 March 2015.

So not only are we landlords providing a service to those wishing to rent but we are also proping up this country to the tune of $425 million a year.

No thanks required.

agree.... until the 2nd last paragraph. But Gareth Morgan and the TOP will sort that!

You're welcome. It appears that rental income is almost equivalent to the accommodation supplement. Some landlords receive an additional tax break and others simply repay some of the tax subsidy they have received. Doesn't appear to be a very viable business without taxpayer subsidies. You "earn" capital gains by exploiting a persons need for a home and then believe you're entitled to extra kudos for this. Wow, that says a lot.

I don't rent to beneficiaries. In my opinion all state funded subsidies should be scrapped. If you cannot afford to pay for the home you live in then move. Far too many beneficiaries living in Auckland when they could be living in areas that would not require a rent subsidy e.g. Invercargill, West coast, Kaitaia.

I exploit people for rent the same way Countdown and Contact Energy exploit me for food and electricity. What's the alternative?...

Communism where the state owns everything and allocates it to citizens?... That has been tried and failed miserably.

The alternative is that we adjust all the economic settings so that home ownership is again the norm and the need for people with attitudes you have expressed here are surplus to requirements.


Sorry,but that doesn't wash. It is quite clear that the tax system here is biased towards property ownership,as the conclusion of the Tax Working Group makes clear.
I am a landlord here and in the past was one in Scotland. When i sold that property,I had to pay CGT even though I had it primarily for the income it produced. As you know,that is not the case here.
Property investors are unfairly subsidised by taxpayers in general and that should stop.

Looks like NZ is a bit of an outlier with a TTE arrangement, but that may not be a bad thing
Trumpists won't understand this link,there are more than three words, but others mighthttp://www.cffc.org.nz/assets/Retirement-Income-Review-2016-submissions/...

Thanks Kiwichas, that's a very interesting paper I'd not seen. At first glance it ducks the issue of inconsistency across the tax system and the distortion that results.

Citizens need to go without early so they have enough funds later. Government need to go without now (eg: don't collect ECST). Because if you consume your resources now, it's not there for you in the future. Magic thinking don't work.
or - retirement funding plan is everybody is shot at age 60.

The taxing of the NZ Superannuation Fund and taxing of private KiwiSaver accounts are separate issues. Taxing the NZ Super Fund is the Government plundering the fund to spend on bread and circuses, and must cease. To advocate ending TTE by abolishing the tax on investment returns, on the other hand, would only increase the gap between the rich who are able to save, and the poor who are not. The answer to the imbalance between the taxable returns on KiwiSaver funds and tax-exempt property ownership is to broaden tax to cover all capital wealth, as advocated by Gareth Morgan, or at least more narrowly impose a tax on land to establish equity between the potential returns from investing in KiwiSaver (or similar investments) and the potential returns from owning property directly.

Not sure what you mean by tax-exempt property ownership?
If you make a profit on property from renting out you do pay tax on profit just like KiwiSaver.
People that make money on selling shares are the ones that do Not pay tax!

You really have got a bit of cactus in your cod-piece about the sharemarket, haven't you.

Not specially, just tell it the way it is!
Many in here continue to pick on housing owners and want additional taxes applied to the owners.
When they sell a house they are taxed on profits and on net profit from rents.
Shares when they are sold for a profit are not taxed unless you are classed as a sharetrader, so there is an anomaly here surely.
Many say property investors don't provide anything for the business community which is wrong as apart from shelter we provide income to all the building trades.
People who buy existing shares don't assist the business community to expand as the initial funds have already gone to the business it is just ownership shuffling!

not entirely correct the non tax is only for the NZX or ASX if you invest in any other market you have to pay tax on CG as you go not when you sell.
check your kiwisaver account and you find you are paying tax on your overseas investing.


Sorry, haven't got a KiwiSaver account.
Fortunately don't need one, as more than adequately covered now with property investment and gives better returns for us!
As for paying tax on overseas markets, isn't it NZ that people want Kiwis to invest in to develop and not overseas?

best returns are in other markets though, that is why most of the NZ super fund is invested offshore

For your own good, consider some kind of diversification. No-one can predict the future so it's wise not to have all your eggs in one basket.

For sure, most shares are brought from previous owners rather than actually providing capital to the company, but without that secondary market the potential for companies to raise money from the market would be very much reduced, and the country and it's industry would be far weaker for the loss.

The same arguments can be made for property investors, unless you are building houses (most transactions are of existing houses), you provide nothing extra. Someone else would be living in those houses if you didn't buy them, either a tenant or owner occupier.

He is getting rattled as the writing is on the wall. Interest rates are rising, overseas buyers are very cautious and our useless PM who neglected FHBers has gone. National will struggle to retain power and Labour and the Greens will implement measures to drive housing prices even lower to help their constituents.

Totally rattled Gordon!
When interest rates hit 6 per cent come back and gloat that you were right, until then the interest rates are insignificant.

Why then are prices moving back in places like Auckland and Christchurch? It is all about perception. Property has had a good run and I should know with my commercial portfolio. LVR's are working which we all know has annoyed you personally and with JK gone DTI's are now on the cards. And I notice shares are still going gang busters. You should be more diversified but of course you need money to buy shares and not bank credit.

Didn't beleive that LTIs are in yet Gordon, unless you know differently?
We all know why prices are stabilising in Auckland and Christchurch without debating it as usual.
The increased deposits to 20 per cent have ruled out many first home buyers and the ridiculous 40 per cent for investors has rules most out of buying.
Problem is that I have heard that some investors can't get anymore from the Bank to do improvements to their rentals so in essence this impacts tenants.
Christchurch sales numbers will be down this month as less buyers around, but returns are still great and prices holding up well!
Yes I think some speculators in Auckland may panic abit!

If you are positively geared as you say you are , why are you so obsessed with property prices having to go up. Do you ever think about what it is like for young people who are just entering the work force now for example and who are looking at some pretty scary numbers to get into their first home, especially in Auckland.

Thanks John. Re ending TTE, bear in mind that nearly 2.5 million are currently enrolled in KiwiSaver & there is talk of auto-enrollment. In the absence of these facts your point would be valid but as matters stand the injustice is falling on the poor and rich alike.

if we dont want to give it to citizens who have worked and paid taxes for 50 years then why are we giving it to the elderly parents of migrants after they have been here for 10 years?

Disagree THE MAN 2. Part of the standard tax avoidance covered at property investor school is to use the excuse "I purchased it without the intention of making a capital gain". This has been so heavily abused that the govt was forced to bring in the 2 year holding rule. Add in the tax offset on interest on debt, and clearly property has had favorable tax treatment vs other forms of investment.

If all the property speculated (by domestic and international owners) had been limited to new builds then a) we would have had plenty of tradesmen trained in the last 10 years, b) here would be more houses available and, c) the specuvestors wouldn't have driven the prices of existing houses to stupid levels we see today.

With JK gone, I picking that this area of inequity will get far more attention election time. This is only 9-10 months away. Ill be voting for full taxation on any investor capital gain, and removal of the tax subsidy, and for it to be backdated for ten years, and more staff at the IRD to collect that.

Its ok, specuvestors can always sell a house or three, or their Bentley to pay for it. Hope they dont all decide to sell at the same time...

could we revisit the total rental figure from IRD?if there are 1.5million households in NZ and home ownership rate is 64.8% ,would that leave over half a million households rented and only 2 billion declared income.

Thanks. Just to clarify the numbers quoted those are the NET profits and NET losses so, yes, the gross rental income would be considerably higher.

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