Axed KiwiSaver tax: Why the Government backed down

The Government has made a major U-turn in less than 24 hours on a tax that would make Kiwi investors $103 billion poorer by 2070.

The plan to subject all KiwiSaver providers' fees to a 15 percent GST rate was met with an instant backlash from savers and fund providers while the Opposition slammed it as a retirement tax.

Just 24 hours ago the Government had a tax plan which would eat into KiwiSaver savings, something Kiwis Newshub spoke to weren't impressed by.

"That's crazy," one said.

"I don't think it's a very good idea at all," said another. 

The plan was to tidy up some GST anomalies.

"It was a proposal to even up GST on fees paid to KiwiSaver providers," said Revenue Minister David Parker. 

It would mean all providers - not just the small guys - would be subject to the standard GST rate of 15 percent. But Inland Revenue said the tax would take in an extra $225 million per year and it'll likely be investors - AKA savers - paying for it through higher fees.

That would affect returns. For example, in a KiwiSaver account with $100,000 in a fund charging 1 percent, the saver would lose more than $21,000 over 25 years.

The plan did not go down well.

"This is going to affect the wellbeing of retiring New Zealanders forever," said Sam Stubbs, the managing director of KiwiSaver fund Simplicity. 

"We think there are much smarter and much wiser ways of tidying up the bill," said Financial Services Council chief executive Richard Klipin. 

What's more the tax tweak with massive implications for Kiwi investors was introduced unannounced and buried in a gigantic tax omnibus Bill.

"They almost tried to get this through without us knowing about it," said Stubbs.

Parker said that's not the case.

But the immediate backlash and political rally cries of it being a "retirement tax", as National Party leader Christopher Luxon put it, meant less than 24 hours later there was a U-turn. 

"We think the furore around this was denting public confidence in KiwiSaver," said Parker.

Newshub understands the Prime Minister read the tea leaves pretty quickly on Wednesday morning and got on the phone to tell ministers to tell them to ditch it, hoping there'll at least be some credit for the swift slaughter of a bad idea.

The smaller providers saying this isn't a good fix is what dropped the axe, the minister said.

"We were expecting some of the smaller providers to support this. None of them have been."

Prime Minister Jacinda Ardern said they listened to providers. 

"We've heard very clearly from them they didn't think that's what it would achieve and so, simple, we won't change it."

Luxon welcomed the backdown. 

"They can say whatever they want. They can dress it up any which way they wish. The reality is that this was a tax on hardworking Kiwis"

Parker admitted it was an embarrassing turnaround, but the flip-flop was welcomed on the streets, with one person calling it a "pretty risky way to test policy".