Tax, investment returns, KiwiSaver and a TWG recommendation

2 November 2018

Pension researchers Michael Chamberlain and Michael Littlewood published their 23 October submission on the Tax Working Group’s suggestions to confer more tax advantages on KiwiSaver . The TWG recommended further tax breaks for KiwiSaver without any supporting evidence for the impact of the current concessions. The TWG’s suggestions were allegedly in support of a ‘fairer’ overall tax system.

The TWG recommended, among other things, a reduction in the PIE tax rate of five percentage points on investment earnings for the bottom two tax bands, with the aim of reducing overall tax for the lowest paid KiwiSavers. The TWG offered no evidence that this change would make any difference to KiwiSaver take-up rates or on savers’ decisions on how much they should be saving.

Michael Chamberlain has since analysed recent data on all KiwiSaver schemes published by the Financial Markets Authority. Chamberlain says that returns for the 12 months to 30 June 2018 illustrate that the TWG’s recommendation on investment returns would have made little difference for the lowest paid savers.

“Of all the ‘balanced’ funds at 30 June, the average return before tax but after fees was 9.15% for the 12 months. After tax at the top PIE rate of 28%, the average net return was 8.48%. In other words, the highest paid KiwiSavers paid a tax rate of just 7.36% on their investment returns, compared with 33% on their other taxable income. That was a huge tax advantage for the highest paid.

“Cutting the middle PIE rate from 17.5% to 12.5% for a 17.5% taxpayer, as the TWG recommends, would have meant an increased after-tax return of 8.85% instead of the 8.73% return they actually received; practically no difference at all.”

Michael Chamberlain emphasised that the real issue should be removing the current tax favours for the highest paid, in the light of the international evidence that they don’t seem to ‘work’.

“Tax breaks for retirement are very expensive, distortionary, inequitable, regressive and demand high, growing regulatory walls around affected assets, to ensure the incentives are not ‘misused’. But worst of all, tax incentives seem not to work (raise overall savings). That’s also likely to be the case for KiwiSaver but we need to find out. The TWG hasn’t bothered to do that.”

Chamberlain and Littlewood’s submission suggested that instead, the TWG should be levelling the tax playing field for all savings and savings-related collective investment vehicles, so that everyone pays their appropriate amount of tax and tax does not distort an individual’s behaviour. That’s what a ‘fair’ tax system should look like.”

Financial Markets Authority – KiwiSaver numbers for 12 months to 30 June 2018

1. There are 33 KiwiSaver investment funds that at 30 June 2018 had an asset allocation with between 50% and 65% in shares and property – call these ‘balanced’ funds.
2. Of the balanced funds, the average return after asset-based fees and before tax was 9.15%. The average return weighted by fund size was 8.84%. Note these are 1-year returns and confirm that the year was a good year and larger funds did not do as well as smaller funds, which is probably what you would expect (except for the very small funds below critical mass).
3. Of all the balanced funds, the average return after fees and after tax at the top PIE rate of 28%, was 8.48%. The average return weighted by fund size was 8.24%. The larger funds were more tax efficient (paid less tax) but still did not do as well after-tax as the smaller funds.
4. The average rate of tax was 7.36% (6.78% weighted by assets). That means most of the returns were non-taxable. The TWG’s suggestion on reducing the lowest PIE rates by five percentage points would have made very little difference to those members’ after-tax returns:
• At the current 17.5% PIE rate: 8.73% to 8.85% at 12.5%;
• At the current 10.5% PIE rate: 8.90% to 9.02% at 5.5%.
5. While the average of all balanced funds after 28% tax and fees was 8.48%, the tax rates ranged from -3.75% to 17.28%. The negative tax rate means that some funds got tax refunds.


A couple of other observations on the FMA’s 30 June 2018 data for balanced funds:

1. The average stated fees for the 12 months ending 30 June were 1.15% of assets but ranged from 0.31% (Simplicity) to 1.78% (AMP Nikko Balanced). These exclude the dollar-based member fees which were paid on top.
2. In addition, members paid ‘in-fund’ costs associated with audit, asset-custody, supervisor’s fees etc. The average in-fund costs were 0.22% of all assets but ranged from 0% (i.e. built into the manager’s management fee and not paid separately) to 0.71%.


Equivalent data (1-year returns and after-tax to 30 June 2018) for the fund options with an exposure to shares and property between 65% and 80% (i.e. ‘growth’ funds) were:

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