Fears KiwiSaver could be hit by capital gains tax

Sir Michael Cullen says the Tax Working Group is looking for ways to stop any capital gains tax from eating into people's KiwiSaver accounts.

The group released its first recommendations on Thursday, including how a capital gains tax might work.

"There's still a lot of detail to be worked through, so it's very hard to give examples of how it might work in particular cases because there are some things we haven't really looked at," Sir Michael told The AM Show on Friday.

"We've done a lot of work, particularly around some of the consequential details of the extension of capital income taxation, but as I say, some quite important bits are yet to be properly considered."

Under questioning in Parliament on Thursday, Finance Minister Grant Robertson wouldn't rule out the tax applying to KiwiSaver.

"Will he today rule out applying a capital gains tax to the 2.8 million Kiwis with KiwiSaver accounts in New Zealand?" asked National MP Paul Goldsmith.

"The working group's report was released today," replied Mr Robertson. "It is their report; it is an interim report. What we are focused on is making sure that we get a fairer and more balanced tax system than the one we inherited."

Sir Michael Cullen.
Sir Michael Cullen. Photo credit: The AM Show

Sir Michael, a former Finance Minister himself, told The AM Show the Tax Working Group will be looking at ways to "offset" taxes on KiwiSaver savings.

"We don't want to end up with a reduction in the returns to low- and middle-income earners in KiwiSaver. One of the best ways of doing that of course... is to look at much heavier regulation of the fees they charge in KiwiSaver schemes."

He said there's no reason providers should be "clipping the ticket" more than 0.5 percent - a Canstar survey in 2016 found many are charging double that.

Minister of Commerce and Consumer Affairs Kris Faafoi told The AM Show fees will be looked at next year, as part of a review of default KiwiSaver providers.

"We've told providers that fees will be part of that. Fees are just one part of the KiwiSaver puzzle, and I think there are other things we need to look at which are more important... people taking active management of their KiwiSaver accounts, being in the right [plan]."

He said it would be a "pretty extreme" step to cap the fees providers can charge, and getting Kiwis onto better plans would have a much bigger impact on their savings.

"A lot of New Zealanders will put their default schemes on very conservative settings and not necessarily make as much money as we would like them to have."

National MP Judith Collins, a former tax lawyer, told The AM Show any capital gains tax would be removed once National got back into power.

Tax system 'needs to be fairer'

Sir Michael, who infamously dragged his heels on tax cuts as the previous Labour Government posted a string of Budget surpluses, said any capital gains tax would have to be "fiscally-neutral" - but not in the way National's GST hike was.

"The trouble was, it was only revenue-neutral for the great majority of people. For those in the top 5 to 10 percent it was highly revenue-positive, because the increase in GST by no means paid for the cut in the top tax rate.

"We're looking here at a situation where wealth is heavily concentrated in the top 10 or 20 percent of the population, so if we're taxing that a bit more through capital income taxation, we can actually increase income at the bottom end in a variety of ways."

Mr Faafoi agrees the tax system "needs to be fairer".

"What I don't want to have is a continuation of the situation here in New Zealand, which is if you can afford to pay an accountant, you pay less tax. That's a problem we've had for some time."

Ms Collins said it was "total rubbish" to offer Kiwis at the lower-end of the income scale a tax break because "most people in that particular income level don't pay any tax anyway".

Judith Collins and Kris Faafoi.
Judith Collins and Kris Faafoi. Photo credit: The AM Show

She also said the cost of administrating a capital gains tax would be "enormous" because people may be required to get valuations done on assets like property, artworks and jewellery.

But Sir Michael says there are people on the same incomes - even at the lower ends - who are being taxed differently, and that's not fair.

"If you think of two people, say they're on about the full-time average income of $50,000 a year. Let's suppose one of them has $25,000 from their labour incomes, wages salary, whatever; and $25,000 from capital income selling assets of one sort or another. The other has $50,000 of labour income.

"The second person pays a lot more tax than the first person. It's not a bit - it's a lot more tax...

"If you're not taxing capital income, you're creating that problem across the board in terms of comparing people in like situations and the amount of tax they pay. It's not fair."

The Tax Working Group's final report is due in February.