Terry Baucher argues the Government shouldn't tax the NZ Super Fund given its public policy objectives

Terry Baucher argues the Government shouldn't tax the NZ Super Fund given its public policy objectives
Who is New Zealand's largest taxpayer? Image sourced from Shutterstock.com

By Terry Baucher*

Which entity pays the most income tax in New Zealand each year?

A few clues: it has fewer than 100 full time employees yet paid over $1 billion in income tax (not PAYE) in each of the years ended 30th June 2013 and 30th June 2014.

It doesn’t sell any products or services but is arguably one of the most important institutions in New Zealand.   

Who is it?  The New Zealand Superannuation Fund. 

If you’re surprised by that, you’re not the only one.  It was a shock to me too. 

The New Zealand Superannuation Fund (the NZSF), sometimes called the Cullen Fund, was established in 2001 to help meet the future cost of superannuation.

In its own words ...

"The Government uses the [NZSF] to save now in order to help pay for the future cost of providing universal superannuation. In this way the [NZSF] helps smooth the cost of superannuation between today's taxpayers and future generations."

The plan is for withdrawals to begin around 2029/2030 although the NZSF would continue to grow until it peaks in size in the 2080s. 

A huge success

The Government made its first contributions to the NZSF in September 2003 and continued until 2009 when contributions were suspended following the Global Financial Crisis.  By that time the Government contributions totaled $14.88 billion.

The NZSF has been a huge success.

Its basic investment objective is to exceed the return on New Zealand Treasury Bills by at least 2.5% p.a.  In fact since inception it has exceeded the Treasury Bill return by 5.06% p.a.

As at 30 September 2014 the NZSF’s value was $26.7 billion and its annual rate of return after costs and before tax since inception is 9.86%.  

These are big numbers but remember the NZSF is barely ten years old and isn’t expected to reach its peak size for another 70 years.

But then the cost of universal superannuation is an equally large problem.

At present more than 650,000 persons receive New Zealand Superannuation at an annual cost of over $11 billion.

Within three years the annual spending on New Zealand Superannuation will exceed that of education.

Which is why the tax treatment of the NZSF seems very odd. 

The NZSF is a Sovereign Wealth Fund yet it’s taxed as if it was a regular superannuation or KiwiSaver fund.  The NZSF therefore has to apply the foreign investment fund and financial arrangement regimes to its investments. Like pretty much everything related to the NZSF the numbers are large: I was told the NZSF’s foreign investment fund calculations involve almost 22,000 line items.

Incidentally, during the year ended 30th June 2010 the NZSF made an adjustment for $124 million tax overpaid in prior years.

According to the NZSF’s 2010 Annual Report this revision related “primarily to the New Zealand tax classification of offshore investments in certain foreign investment funds for the 2007, 2008 and 2009 income years”.

If even an organisation as big and well-resourced as the NZSF can get the foreign investment fund regime wrong, what hope for the average person?

A total of $4.36 billion in tax

Thanks to its investment success, the NZSF therefore pays tax, lots of tax.

Since 2003 it has paid a total of $4.36 billion in tax.  In its first few years the Government’s capital contributions exceeded the tax paid.  However, in the year ended 30th June 2010, when the Government made its last capital contribution of $250 million, it received in return $372 million of income tax. 

In the year ended 30th June 2013 the NZSF broke the billion dollar mark for the first time and for the year ended 30th June 2014 its tax bill was almost $1.1 billion ($1,094,556,000).  In the four years to 30th June 2014 the NZSF has paid almost $3.2 billion in tax.

To put these numbers in context, the billion dollars tax paid for the year ended 30th June 2013 represented 10% of ALL company income tax receipts for that year. The $1.1 billion for the June 2014 year is 1.78% of the total $64.5 billion tax for the year. Based on Treasury’s models, without the NZSF’s contribution, personal income tax rates would have to be one percentage point higher. Alternatively the company income tax rate would need to be raised to 31%.

Consequently, the NZSF is now a very handy cash cow for the Government. 

But is that what should be happening? 

Residential property investors paying less than half the tax paid by NZ SuperFund

The tax treatment of the NZSF begs a number of questions about the current tax treatment of savings. It’s also tied into the larger issue of the ongoing affordability of universal New Zealand Superannuation, a matter which not many politicians seem keen to engage with realistically.

One question is whether funds in retirement savings vehicles should be taxed at regular rates when access to those funds is limited?  New Zealand is something of an outlier in its tax treatment of retirement savings.  Australia, Canada, the UK and the USA all give various concessions to retirement savings.  Perhaps, as the Financial Services Council argues, it’s time to reconsider this issue.

Alongside this issue is whether shares and bonds are overtaxed relative to property.

As I noted in a previous column the net taxable income from residential property investors for the year ended 31st March 2013 was $1.5 billion. Assuming a flat 33% tax rate that’s tax of $500 million or just half of the amount paid by the NZSF for the same tax year. 

The value of the NZSF at 30th June 2013 was $22.5 billion.  By contrast the value of all residential investment property was estimated at $200 billion in 2009.

In other words, despite an asset base almost nine times greater than the NZSF, residential property investors paid less than half the tax paid by the NZSF.

Once you factor in the ever growing value of KiwiSaver funds the discrepancy between the tax treatment of managed funds and that of residential investment property seems unsustainable.

Why are we taxing the NZ Super Fund at all?

Finally, the biggest question of all remains: "Why are we taxing the NZSF at all?"

The Government’s decision to suspend contributions was perhaps understandable given the state of its books after the GFC.  However, suspending contributions but continuing to collect a substantial sum of tax from the NZSF seems to represent a double whammy.

Surely, given its objectives, taxing the NZSF is a case of the present Peter robbing the future Paula.

If so, is that something the future Paula will thank us for? I doubt it.  

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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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This is my Monday ( sorry Tuesday ) morning WTF moment !
Its an  absolutely astonishing story  !
Why on earth are they taxing something they know is facing an actuarial shortfall at some future date ?
Its little wonder they want to extend the reitrement date to 67 or 70 , now I know why
Why dont they re-invest the entire amount ?
I could not believe this when I read it , so I have read thie piece ........... twice .
I still did not beleive it , so I did some research .
So we Tax the income earned by the NZ Superannuation a Billion Dollars  , which is expecting an actuarial shortfall  within a decade and do what with the money  ?
What does the Govt. use the money for anything specific  ?
We can be sure of one thing , they dont spend it nearly as carefully as we who have to earn it 
Probably used  to pay for other tax merry-go-rounds like Working for Families and Social welfare payments for the unemployed  

... we all do a collective " WTF " every year when they announce the monster tax take from the Cullen Fund ... money that ought to be reinvested back into the fund , to compound it's future growth ...
 
Think of this as indicative of the " brains trust's " ability to run the country , dole out other peoples' money , offer you a pension one day .... these are our leaders , the government , those who think they know best ...
 
... now are you scared witless , sh*tless ... or have you fainted already ?

It's a crying shame the Government stopped contributing to the NZSF 6 years ago. 

Esp as since then markets have doubled; would have been the best time to buy, but instead they stopped buying..

.. do you recall the flak on talkback radio , when Mr Bruce Russell and his co-horts lambasted the government for considering " borrowing money " to invest in the Cullen Fund ... especially when the market had crashed ... and therefore , in their " expert " opinion , was likely to crash again ....
 
What choice did Wild Bill have but to pull back from investing more money into the fund , in the face of widespread public opprobrium ..... at the very best time to pour money hand over fist into sharemarket investments .... invest when there's blood on the floor of the market ....

Its scandalous !
Not only are they not expanding the Cullen Fund , they are actually plundering it .
John Key has some explaining to do

I actually don't have a problem with the NZSF paying tax.......that billion odd in tax that the Government is able to collect can be used to offset the current cost of retirement benefits....
 
Given that it will be around 2027/8  when the last of the BB'er will retire and the fact the fund is still growing and expected to reach its peak around 70 years time I think it is good that some tax can come out now to offset costs incurred now especially when we have such a high amount of Government Debt.
 
I would like a bit of clarification on the figures you have quoted Terry in regards to the value of all residential investment property sitting at the $200 billion mark..........are you sure this figure only includes residential investment property???

The $200 billion figure for residential investment property was calculated by the IRD in 2009 for the Tax Working Group.  I recently asked IRD for an updated value but they were unable to supply one as the previous figure had been a one-off exercise for the purposes of the TWG.  See page 16 of the final report
http://www.victoria.ac.nz/sacl/centres-and-institutes/cagtr/pdf/tax-repo...

Thanks for that link Terry..........

The NZSF has been a huge success.
Its basic investment objective is to exceed the return on New Zealand Treasury Bills by at least 2.5% p.a.  In fact since inception it has exceeded the Treasury Bill return by 5.06% p.a.
As at 30 September 2014 the NZSF’s value was $26.7 billion and its annual rate of return after costs and before tax since inception is 9.86%.  
These are big numbers but remember the NZSF is barely ten years old and isn’t expected to reach its peak size for another 70 years.
 
It is necessary to put the returns into perspective - those derived from foreign western stock markets by definition are unsustainable, largely due to QE, which ends today.
 
From March 2009 through June 2014, the S&P 500 has increased 4.7 percent a quarter, about five times faster than gross domestic product, data compiled by Bloomberg show. That’s the biggest gap since at least 1947. Read more

A good point Stephen and one which the NZSF recognises itself.  They do expect returns to fall and they are certainly not banking (pun intended) on 10% pa growth indefinitely.

Noted Terry. I guess we cannot claim dilution of the money stock as symptom in New Zealand - but the export of QE USD is certainly put to use despite the so-called constraints of what some claim is an unsustainably high OCR.
 
There have been some stellar performers on the New Zealand sharemarket this year as it has surged ahead breaking new records. Read more

How much of that $26 billion is invested locally, creating jobs locally, and how much is invested overseas creating jobs offshore?

Stick it all offshore - one 7 magitude earthquake/decade - we need some insurance!

What is the difference in return? Would all that money forced to stay in NZ be invested well?
regards
 

A particularly poignant commentary on that matter;
 
http://www.zerohedge.com/news/2014-10-27/unlike-ebola-patients-markets-a...
 
 

Why should we be concerned if NZSF pays tax ...  it just means the Crown can return to paying in again that much earlier without borrowing.
 
I see this as a non issue and am surprised it has generated the shock horror responses it has.
 
It all nets out OK either way. If they paid no tax - the Crown would be worse off and delay the restart of contributions.  Makes no difference whatsover.
 
There is a logic in keeping all entities on the same taxation basis.

We need to remain objective , so we dont lose our heads .
We actually need more information about this fiasco .
Was the fund set up correctly , to be either tax neutral or at least tax efficient ?
After all , its seed Capital comes from our taxes which we paid in the first place , so we need to know the truth .
Then it would be interesting to see the breakdown of the Income Tax bill .
For example , is the tax paid only on dividend and interest income , or are they treated as share traders / dealers and taxed on the trading gains ?
In which case , there could be a massive contingent tax liability sitting there in unrealised gains .
I , like many , are going to be entitled to this super in a few years time and dont want to discover that I have been paying my  taxes  into a smoke - and - mirror pit of creating accounting and slight - of -  hand nonsense
 

Super fund.  Investment.  Phenomenally sucessful.
But it's not the New Zealand way.  ie.  borrow and hope.
Send in the Daleks  "It must be eliminated"

"In other words, despite an asset base almost nine times greater than the NZSF, residential property investors paid less than half the tax paid by the NZSF."
 
Could you please elaborate on the relevance of this? - Aren't taxes (other than rates) generally on income or capital gain.  Property prices could plummet 50% and by this arguement they would still have an asset base 4.5 greater than the NZSF - so what. Businesses don't get taxed on their asset base - but on profit (and arguably should also be taxed CGT on sale). 

I do not have a problem with the NZSF paying tax as it is effectievly offsetting current year borrowing. I do have a problem with residential property investment particularly with Auckland, in that there is no enough of it..currently there is a housing shorage where people are living two or three families to houses. I do not expect the state to do this, howvever if there were incentives for private investors to build social housing this issue could be addressed. Capital gains tax is a disincentive to that investment.

Wouldn't they be better encouaging businesses, people that actualy make stuff and export it? People that create jobs that in turn pay the mortgages. Debt without the backing of production has to be high risk.

agree

That might be good as a policy at the same time....but how do you suggest we house homeless people or it better for them to live as they are? The fact is is that social housing is needed now as well as jobs that can pay affordable mortgages or rent!
 
 

They would need to move to where the jobs are, empty house all around me.

Forced relocations as a policy? Or uplifting complete communities?  I uncle Joe tried that and wasn't very liked...

I doesn't make much sense to have high welfare dependency in Auckland, while in rural areas we are importing Islanders and Filipinoes to do the work.
  People have been moving where the work is for generations, I did it when I was young.

A private investor pays a commercial mortgage rate, the Govn can go out and get a bond of say 25 years at probably 1/2 that.
Ergo it makes far more sense to take the lower cost, plus the Govn has an asset at the end of the day.   The Govn can also think bigger, ie an apartment block where that makes sense.
regards

The commercial mortgage rate should be cheaper than what it is.......in fact commercial rates should be below ordinary house mortgage rates......if you don't have business then you can forget about the rest for is can't exist.......
 
The Government can think bigger....and that is a problem in itself......more wastage.......higher costs.......and if the Government or its Agencies were any damn good they would have firstly been able to ensure that their current housing stock had been looked after properly.......
 
The fact is developers even with the higher interest rates can bring in a development cheaper to the market than any Government agency could ever do........in fact if you ran a competitiion between a developer and the Government and built like for like apartment blocks you'd find the developer would make more from the deal than the Government........"The Block" could have a whole new format fora programme here.
 
 

Does social housing encompass the following observed realities?
 
Starting this Wednesday, 4,000 men (and, yes, they’ll mainly be men) will gather in a giant hall in London. Among them will be major property developers, billionaire investors and officials of your local council or one nearby. And what they’ll discuss will be the sale of public real estate, prime land already owned by you and me, to the private sector. The marketing people brand this a property trade show, but let’s drop the euphemisms and call it the sales fair to flog off Britain. Read more
 
Last year Madrid’s city and regional governments sold almost 5,000 rent-controlled flats to private equity investors including Goldman Sachs and Blackstone. At the time, the tenants were told their rental conditions would remain the same.
But as old contracts expire, dozens of people have received demands for higher rent, been told their rents will increase dramatically, been threatened with eviction or moved out to escape the insecurity. Thousands of Spain’s poor now depend for their homes on the generosity of private equity. Read more
 
I can only forsee NZ taxpayers supporting both the poor and the private landlords in their endeavours to house the unfortunate amongst us.
 
This NZ Herald reporter guessed as much too;
Bill English's masterplan to radically "reform" the Labour-initiated, octogenarian state housing scheme has all the hallmarks of being ideological for ideology's sake.
Overall, however, the reform gets more and more bizarre. Essentially, a market is being set up and organisations that cannot otherwise afford to enter it are being subsidised so they can enter it. Is this the Treasury's new take on market economics? Whatever, the taxpayer is the loser. State housing was not broken so why did it supposedly need fixing? But then in this case, ideology rules, okay. Read more