Finance Minister Nicola Willis has asked officials for advice on whether to make the New Zealand Super Fund tax exempt, as its annual bill begins to outgrow Crown contributions.
In the 2024 fiscal year, the Super Fund paid $1.5 billion in tax after achieving a 15% return, which increased the value of its assets to $76.6 billion.
This was a strong result for the world-beating sovereign wealth fund. Since 2003, it has added roughly $50 billion of value to a $26.5 billion contribution from taxpayers. This money will be used to help pay for superannuation starting in 2034.
But by then, the Government’s net contributions to the fund will have fallen to just $6.9 billion, according to the Treasury, as taxes effectively claw back most of the money given to it.
The Crown has contributed a net $16.9 billion to the Super Fund when accounting for the $9.6 billion it has paid back in taxes in the past two decades.
Jo Townsend, the Guardians of the New Zealand Super Fund’s new chief executive, said the taxpayers' net contribution during the year ended June 2024 was only $100 million.
“Based on the current modelling, that is effectively expected to switch into net negative tax contributions in the year going forward,” she said
Free the fund
Townsend said it was for the government to choose the net contribution rate. However, there were cost savings and efficiencies which could be realised if the NZ Super Fund were tax-exempt.
The fund has to sell long-term assets to pay each annual tax bill which comes with transaction and opportunity costs which were ultimately paid by taxpayers and could be avoided.
In theory, Willis could exempt the sovereign wealth fund from paying tax and adjust the contribution rate to minimise any impact on the Crown’s day-to-day finances.
The Guardians of the New Zealand Super Fund asked for this to be considered in its briefing to the incoming minister after the 2023 election. It was also one of many recommendations made by the Tax Working Group in 2019, which described its tax status as an “oddity”.
On Tuesday, Willis confirmed she had asked officials for fresh advice on the tax status of the Super Fund and was expecting to hear back in the next few months.
Barbara Edmonds, the Labour Party’s finance spokesperson, said she had discussed the issue with the Guardians of the New Zealand Super Fund several times.
If elected Finance Minister, she would review the contribution rate and would lean towards making the fund tax exempt — after taking advice.
Fiscal implications
The Guardian’s have argued transfers between the Super Fund and the Crown are fiscally neutral as its assets are already counted on the Crown balance sheet.
However, there are implications for what can then be done with that money and on politically important fiscal indicators. Crown contributions are funded from the annual operating allowance and crowds out other spending priorities or gross debt repayments.
Willis has also opted to set a net core Crown debt target in her fiscal plan. This measure excludes the Super Fund and would improve if assets were sold to pay down core debt.
These are the two indicators used to demonstrate the Coalition Government’s fiscal position and judge their performance as stewards of taxpayer money. They are politically and practically important, even if the overall balance sheet isn’t affected.
One reason why the Super Fund was given tax obligations was to provide governments with some flexibility to manage the short-term fiscal implications of filling up the fund.
A government can opt to suspend contributions and effectively withdraw money from the fund to bolster the operating balance, or pay down debt elsewhere on the balance sheet.
The previous National Government did this in 2009 to improve some fiscal indicators during the recession and contributions were not resumed until Labour was elected in 2017.
Guardians of NZ Super said in their briefing to Willis this was still possible but “inconsistent with the intergenerational purpose of the Fund and with the express intent of the Act”.
Willis has previously said she doesn’t plan to stop contributions, despite being in a tight financial spot. However, the balance between taxes and contributions means the Crown will begin withdrawing small amounts of money from the fund starting next year.
Benchmark beaten
Whether that's a feature or a flaw is likely what Willis has been seeking advice on. It’s essentially a choice between saving more for the future or pulling back some funds to address immediate needs.
To date, saving money in the Super Fund has paid a handsome dividend. It has averaged a 10% return over the past 20 years and outperformed Treasury bills, a measure of risk-free returns, by 6.5% each year.
This year, it beat that risk-free benchmark by 9.33% or $6.3 billion, even though it marginally underperformed its passive reference portfolio — which was driven by huge returns among a handful of US tech stocks.
Treasury and the Minister of Finance arrange an independent performance review of the Super Fund every five years. The most recent report was tabled in Parliament on Tuesday.
It found the fund had an exceptional investment process and was still outstanding among its global peers. However, it also noted it would need to be ready for change in the next five years, with new leadership still settling in and likely headwinds in capital markets globally.
Townsend said the reviewer’s feedback would be “front of mind” as it scaled up the fund over the coming years. Treasury projects that by 2044, the fund will be worth over $200 billion.
At that point, it is expected to contribute $1 billion annually towards pensions and pay $4 billion in taxes.
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