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Although intertwined with the issue of capital gains, finding a fairer treatment for retirement savings is arguably the most important objective for the TWG, says Terry Baucher

Although intertwined with the issue of capital gains, finding a fairer treatment for retirement savings is arguably the most important objective for the TWG, says Terry Baucher

By Terry Baucher*

Rather like Dug in Up almost all the commentary around the Tax Working Group’s (TWG) interim report has chased the squirrel of capital gains tax (CGT).  

 Although probably inevitable, the focus on CGT risks overlooking some of the other issues analysed in what is probably the most comprehensive overview of New Zealand’s tax system in nearly thirty years. These other issues would include land tax, GST and retirement savings.

Although a final decision on the optimum approach to taxing capital gains will wait until the TWG’s final report next February, the Government has accepted that the TWG need not carry out further analysis of areas such as wealth tax, land tax, changes to New Zealand’s petroleum and minerals royalty regimes, GST coverage and a financial transactions tax. 

I am very surprised that a land tax is completely off the table, particularly after the Victoria University of Wellington Tax Working Group came out strongly in favour of it in 2010. Reading between the lines, the TWG appears to have decided the politics of a land tax are even more difficult than those around a CGT.  Conversely, given the general tenor of the TWG’s comments on the issue of taxing capital, removing the land tax option probably increases the likelihood of either a CGT or taxing capital based on a risk-free rate of return being recommended.

No change for GST

On the other hand it is no surprise that the TWG isn’t recommending changes to the current GST framework.  The arguments for exempting food from GST are pretty comprehensively demolished by the following graph illustrating the average weekly benefit for each income decile resulting from removing GST from food:

Figure 12. 6: Weekly benefit for each income decile of removing GST from food and drink, 2015/16

In order to achieve this benefit, the TWG estimates an exception for food and drink would reduce the GST take by $2.6 billion. As the group notes, if that amount was instead redistributed, each household would receive $28.85 per week, or practically double the benefit of a GST exemption for the lowest two deciles. As the TWG concluded other measures than an exemption, such as welfare transfers,  would be likely to produce greater benefits for the same cost.

This point is also borne out when considering an alternative measure, an across the board cut in GST from 15% to 13.5% costing $2 billion annually. The result was indentical to that for introducing a GST exception; there were significantly greater benefits to households in the highest income decile.

The TWG then compared a GST rate reduction with two alternative measures: a tax-free threshold of $7,000 and halving the lowest tax rate from 10.5% to 5.25%.

Figure 12.4: Benefit in terms of percentage of disposable income, 2015/16

The conclusion was that based on percentage of income, reducing the GST rate to 13.5% would provide greater benefits to households in the lowest income decile when compared with the suggested income tax changes. However, there were fewer benefits for households in deciles 2-9 and households in the highest income decile would be the biggest winners.

The TWG therefore decided against recommending a reduction in GST rates, suggesting instead:

“If the Government wishes to improve incomes for very low-income households, the best means of doing so will be through welfare transfers.

If the Government wishes to improve incomes for certain groups of low to middle income earners, such as full-time workers on the minimum wage, then changes to make personal income taxes more progressive may be a better option.”

As part of its review the TWG looked at whether financial services such as bank fees should be brought within GST and eventually determined “there are no obviously feasible options for doing so.”  Instead, the TWG proposes the Government should monitor international developments.

The TWG also dealt briskly with the idea of a financial transactions tax (or Tobin tax) on tax on the purchase, sale, or transfer of financial instruments. This was proposed by ‘many submitters’ on the basis of improving market stability and discouraging speculative trading. The TWG concluded:

“The revenue potential of a financial transactions tax in New Zealand is likely to be limited, due to the ease with which the tax could be avoided by relocating activity to Australian financial markets…A financial transactions tax is an inefficient tax that is unlikely to raise significant revenue for New Zealand.”

The door isn’t completely shut on a financial transactions tax, with the TWG recommending the ongoing international debate on the issue be monitored.

Changes ahead for KiwiSavers?

In many ways it’s appropriate Sir Michael Cullen is chair of the TWG as his imprint lies directly and indirectly across the current treatment of retirement saving.  Sir Michael was part of the Fourth Labour Government’s radical overhaul of savings in the late 1980s which adopted the present Taxed - Taxed - Exempt' (TTE) basis for retirement savings. In 2007 as Finance Minister in the Fifth Labour Government he introduced KiwiSaver and the Portfolio Investment Entity (PIE) tax regime.  Both, were, more than a little ironically, measures aimed at redressing some of the issues which emerged in the wake of the adoption of the TTE regime.   

The report’s review of KiwiSaver begins with an interesting analysis of the impact of inflation on taxation. The report observes:

“Although inflation is currently low, nominal interest rates are also low; this has made inflation a larger component of the nominal interest rate and therefore increased the real effective tax rate on debt.”

The effect of inflation is illustrated in the following table:

Table 7.2: The future value of $1,000 invested today after 30 years



No tax

Tax real income

Tax nominal income







Future value of $1000 in 30 years







Effective tax rate on nominal income







Effective tax rate on real income
(after taking account of inflation)







The report concludes that the member tax credit offsets the impact of taxing nominal income for KiwiSaver members earning up to approximately $100,000 per annum.  Above that level of income the member tax credit’s effectiveness diminishes.

As the TWG report notes the TTE basis of taxation was, and remains, a significant divergence from the ‘Exempt - Exempt - Taxed' (EET) basis common in many OECD countries.  However, reverting to EET would be a very expensive move: the report estimates the annual fiscal cost of doing so would be at least $2.5 billion initially. 

Even with strict limits on contributions most of the tax benefits of moving to an EET system would flow through to high-income earners.  The TWG, rightly in my view, considers there is “little value in providing incentives to high income-earners, who are likely to be saving adequately in any case.” (Part of the reason for high income-earners being better savers is that they are more likely to be property owners).

This background of inflation and the potentially expensive and regressive risks of saving concessions led the TWG to:

“Focus on options that are targeted towards low- and middle-income earners - which, in turn, will disproportionately benefit women (who are more likely than men to be on lower incomes, due to part-time work or time out of the paid workforce for caring responsibilities).”

The TWG’s two main proposals are therefore:

  1. Remove the Employer Superannuation Contribution Tax (ESCT) on the employer's matching contribution of 3% of salary to KiwiSaver for members earning up to $48,000 per year; and
  2. Reduce the lower PIE rates for KiwiSaver funds by five percentage points each.

The ESCT proposal would reverse the change introduced in the 2011 Budget and revert the treatment of employer contributions back to what it was when KiwiSaver was established at an estimated annual cost of $180 million. The reduction in PIE rates for KiwiSaver funds would cost a modest $35 million annually.

The TWG also considered the implications for KiwiSaver funds of taxing gains on New Zealand and Australian shares, a matter raised by National MP Paul Goldsmith in Parliament last week. The measure would impose tax of approximately $15 million per annum for those KiwiSaver members with income below $48,000, far outweighed by the proposed changes.

However, the change would cost approximately $45 million per annum for higher income KiwiSaver members.  As a counter to this, the TWG suggests the member tax credit could be increased from its present 50 cents per dollar to 60 cents per dollar at an annual cost of $190 million. 

Although intertwined with the issue of capital gains, finding a fairer treatment of retirement savings is arguably the most important objective for the TWG. This is because there are now almost 2.9 million KiwiSaver members, 1.3 million (46%) of whom are under the age of 35.

The sums involved with KiwiSaver are large and growing: in the twelve months to August 2018 employer and employee contributions exceeded $5.4 billion with Member Tax Credits contributing a further $785 million. Employees and employers contributed a record $612 million in August 2018 alone.

The TWG proposals for retirement savings therefore will have a significant impact for a large and growing number of New Zealanders long into the future. The interim TWG proposals are modest but do represent a positive step forward. More than just property owners will be watching and awaiting the TWG’s final recommendations.

*Terry Baucher is a tax consultant and director of Baucher Consulting Limited a specialist tax consultancy. He is the co-author with Deborah Russell MP of Tax and Fairness published in 2017 by Bridget Williams Books.

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Good point about the land tax idea. This thread on reddit has a good break down of how badly the TWG got their analysis of it.

Yes it is a pity that a Land Value Tax was not even on the table. It seems the most logical way to tax wealth as opposed to income. Unfortunately, how social welfare and tax interact was also not on the agenda. Or even the far bigger question: what should the government be spending in the first place.

One of the big challenges that NZ households and business are going to face over the next 2 years is uncertainty. The tax working group continue to throw suggestions, ideas and desires for commentary to the media which every day raises partisan beliefs on either side of the fence. The framework, posturing and slow pace of any implementation (given NZ is a nation of only 5 million people) and how open the economy is to the wider world will not do anything to encourage confidence.

What they need to do is focus on each area at a time. Property should be the first because that is where the biggest distortions are in the economy and where capital needs to be re-allocated to productive enterprise. For the sake of the country, get some decisions made in the next 8 weeks and implement them by January. Then set a framework to have other areas addressed by the end of the next quarter. The country needs to be run like a business, private consultation between a management team and then faster implementation across the network. This is all so painfully slow with so many interuptions, media leaks and speculation at present people that people will just sit on their hands, (with negative affects on the wider economy) waiting for decisions to be made, I've never seen anything like it, you would have thought we were negotiating on Brexit with a load of European religious fanatics - we're starting to look like the muppet show!

Parliament are the muppet show, just look at the events there over the last two weeks. What’s playing out seems to be the best situation Boomers could have hoped for. Winston is the Prime Minister in all but name and he’s not going to allow radical change that affects his constituents. Labour is impotent. The result is the status quo.

Hi Nic and anyone else willing to listen. If you really want to fix the distortions particularly in property then here’s a petition for you:

Positive money is advocating to stop banks creating money/debt out of thin air. This would have the biggest positive impact on all the things you’ve mentioned. I hope you’ll consider it.

Thanks and I will.


Banks "create" money by writing out mortgages.
The more they create, the more money they make.

One of the reasons why house prices in NZ are so high.

Yes, restricting credit creation based on housing debt would the be a good place to start. With foreign buyers reduced banks increasing their loan books is pretty much the only way house prices can rise. Slower credit creation may be a short term drag on the economy but you can't bring demand forward forever.

Thanks everyone. Left or right wing, I think most who understand it realise that this would help our issues at a fundamental level not the superficial policies we see now. I only hope this petition is marketed effectively as there aren’t many signatures so far...


I have added my support... whether it get's beyond the mainstream, bank sponsored media will very much depend on the strength of character and skills of the readership of this site...... I will endeavour to support it.


The tax working group should be seen in the context I have been putting on this from some years, the battle for unearned income.

It is nothing about fairness and all about securing revenue when traditional streams dry up or become stretched.

Unearned income is income that people receive in social welfare payments!
That is, unemployment benefit, sickness benefit and single parents benefits etc!
These are the payments that need to be reduced!
Capital gain on property is not an unearned income whatsoever.
Landlord / owners do a helluva lot of work that is not claimed for and any capital appreciation they receive is reasonable.
If you don’t like it then it is up to you to invest and see how well you can do, rather than just damn welll moaning about it!

Do you have a problem with sickness benefit and single parents benefits, TM2?
What do you propose we do with these deadbeats who are deemed incapable of working?

I am especially glad that you are happy to take a huge hit to your property values by removing the social welfare transfers that support the market rent.

Landlord / owners do a helluva lot of work that is not claimed for and any capital appreciation they receive is reasonable.
So you are saying that they are earning an income?
Why then is it not taxed? Don't we tax all other forms of income?

Hey TM2 have you seen this clip by Jordan Peterson?
There needs to be some sort of safety net for these types of people.

Watch the whole vid, but do check from around 4.20 min onward.

What do you suggest we as a society do with these folks.
It's a hard question, should be answered somehow though.

You forgot the pension - which is the worst offender as it's given regardless of need.

Of course I have problems with some of the benefits that many people receive.
We have generations of people in NZ that continue to rely on handouts from the country.
Certainly haven’t taken any hits to values of our portfolio, not sure where on earth you got that from??
Professional landlords are earning an income if they are positively geared and we certainly pay tax on our property holdings!!
Property is heavily taxed and employs many people who are also taxed!! !

Of course I have problems with some of the benefits that many people receive.
As you always say, stop moaning and do something about it.
How about you and your gaggle offer your rental properties to the market at a quarter of their current value. The effect would be to significantly reduce the social welfare burden and make families less reliant on the accommodation supplements that sustain the current level of market rent.

Or...Is the taste of one's own medicine a bit too bitter for you, TM2?

I disagreed . We need to get the country's revenue earnings up (ie exports) so that jobs are created so that people can earn decent money to afford rent or mortgage payments. Because of technology making people redundant, we are forcing people on to benefits and the circle goes on and on.

How's your holiday? We are so grateful that you have found the time check in on us.

Going great thanks for asking.
In Las a Vegas currently in queue to see Michael Jackson show

Hate to tell you but you might be a bit disappointed there.....

Hopefully his so called portfolio will stop dropping in value and he will be able to afford a holiday to Europe.

..he's probably in it. Playing a boy.

Michael Jackson show was really good. Saw Adam Lambert And Queen last night and Donny and Marie night before.
Hardly a Boy now Gordon!
News for you is that prices of housing in ChCh is going up and new developments are progressing.

I hope you are going to have a drive about. You are close to the grand canyon, I'd do North Rim be fantastic this time of year.
Jump on a southwest flight out of Phoenix to Boston and go see the fall colours. Spend some of that hard earned dosh. (i'm being facetious)

A visit to the 'Mecca' for all Gambling Addicts!

Dear "The Man",

We run an economic system based on price stability. Inherent in that approach is a requirement that a percentage of the population must be unemployed.

The TWG also dealt briskly with the idea of a financial transactions tax (or Tobin tax) on tax on the purchase, sale, or transfer of financial instruments. This was proposed by ‘many submitters’ on the basis of improving market stability and discouraging speculative trading. The TWG concluded:
“The revenue potential of a financial transactions tax in New Zealand is likely to be limited, due to the ease with which the tax could be avoided by relocating activity to Australian financial markets…A financial transactions tax is an inefficient tax that is unlikely to raise significant revenue for New Zealand.”

That sounds disingenuous. Tax is not only about revenue and they must surely know that. If transaction tax improved NZ market stability and relocated speculation to Australia that would be a win-win. Yes I know, big "If".

Can someone answer this question for me. I buy a house for $500k and sell for 1 million 10 years later. Before selling I spent $100k turning the rumpus room into a self contained flat and another $100k on repairs and maintenance such as a leaky roof and rotten bathroom. So, what is the capital gain when I sell?

$300,000. The problem I have with a Capital gains tax on property is that If you have paid Capital gains on one of your properties you must be able to claim Capital losses Unintentional consequences down the road. Who will end up footing the bill the Taxpayer of course thats human nature. if you cannot make money one way make it another way.

If you lose money on property you have done something seriously wrong.
Buy right firstly and you will never lose

Anyone that thinks that landlords get unearned income then they are dreaming
Yes times have been great capital gains wise over the past few years, but they sometimes have to put up with poor tenants
Nothing new here!

Oh poor little landlords, what a hard life they have.

Sorry but I have no sympathy for young renters, I have seen how the next generation carries on. Do you seriously think they will be any different than the current boomers when they get to the same age ? I actually think they are going to be far worse.Their expectations or should I say self entitlement is on a level that makes me sick.

Well the boomers give a good example of greed and selfishness to the next generation ain’t they.


"I have no sympathy for young renters". That remark evokes in me,a mixture of pity and anger. I pity you and your lack of empathy for others and I am angry at your selfishness. What a miserable specimen of humanity you are,but you fit right in with some others here like TM2.

How about stopping the tax on my term deposit ? If you want people to save for their retirement and not go putting all their money into housing to get a decent return, why not drop the TD tax ? I can remember when there was no tax on your interest. Yeah probably not because they are looking to get even MORE tax not less tax. Doesn't matter how they spin it, this government is looking for more tax money.

It’s not all about you!

Who is it about? Who decides who it is about?

Wrong Nzdan, It's all about Carlos now, because he sold out of property a month ago.... Now he wants to promote a different stroke for a different folks! He's a one off, one property guy who is out!

Agree with Carlos, that the last couple of generations are very selfish and not the Boomers.
Have children myself and so am around the millennials etc, and yes they may have been to Uni but they are greedy and expect everything on a plate for them.
They are not prepared to get off their butts and work extra like the Boomers have.
The Baby Boomers and the next generation after that have seriously earnt what they have got, well I know I have anyway Gordon!!

The apple doesn’t fall very far from the tree and I guess the same must apply to your children’s social circles. Because you’re talking anecdotally of course. Your kids don’t represent the greater generation they were born into no matter how much that idea fits your narrative.

Yes, generalisations about generations are always fraught.

What can't be argued with however are statistics. The one that worries me more than anything is the climbing rate of youth suicide;

Of the DHBs, Auckland had the highest increase of suicide deaths - 73 which was a 70 per cent increase on last years figures. Mental Health chief Shaun Robinson said the statistics show New Zealand's provisional suicide rate is now the highest it has been this century... In the 1990s New Zealanders made a unified effort to reduce suicide and it worked, he said..."The last Government dropped the ball and allowed our suicide prevention strategy to lapse without replacement."

The highest number of suicides was the 20-24-year-old group with 76 deaths. The next highest was the 45-49-year-old group with 67 deaths.

So many issues need to be addressed to turn this around. I wish the Government and the current Mental Health Inquiry God speed on this one.

Yes it does!
Was a real estate agent in a previous life, And I can tell you that the last couple of generations are not into improving their financial position by doing their own renovations, like the Boomers did.
Open Days they would be looking for property worth more than they could afford.
The smaller deposit required for new housing is also encouraging this, which is wrong as well.

So what if they are looking at property worth more than they can afford? Did you survey each and every person on their financial situation and their motives for attending? Some could be taking a break from renovating their first home to get some design ideas. Most of the attendees were probably having a leisurely browse at something they wouldn't mind owning one day, a goal to aspire to.

I'm a Millennial and there are PLENTY of people in my wider circle of friends/acquaintances who work hard and own their own homes, some are in the process of renovating and others don't need to. We bought an ex-rental do-up for a lowball price and are in the process of renovating.

Again you have my sympathies that your children and their friends severely lack work ethic and the drive to get themselves ahead in life, maybe they saw what their equity debt stacking parents were doing and thought that's how to do it.