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

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 »