Government's KiwiSaver tax backdown: National euphoric, ministers don't want scheme undermined

The National Party is euphoric over the Government's stunning backdown on plans to charge GST on KiwiSaver fees less than 24 hours after introducing new legislation into the House.

"Clearly this is a poll-driven Government," National's leader Christopher Luxon said on Wednesday afternoon.

"The big takeaway from this is they are desperate to hang on to power and they will do anything that is needed in order to do that. They will even betray their own principles to do that and that's what we have seen."

Revenue Minister David Parker admits it's slightly embarrassing, but believes the proposal has been misrepresented by some as being a tax on KiwiSaver contributions rather than fees.

The plan was to apply 15 percent GST to KiwiSaver fees from April 2026, which Inland Revenue (IRD) estimated could net the Government about $225 million a year. Little was said about it on Tuesday until a new tax Bill was introduced, revealing the details. 

While some small fund managers wouldn't incur any new costs under the plan, others "may incur significant transition costs", which could then be passed on to individual Kiwis, IRD advised ministers. Modelling from the Financial Markets Authority shows it could lead to KiwiSaver balances being reduced by $103 billion by 2070.

But just after 1pm on Wednesday, the proposal was killed.

Revenue Minister David Parker said it was intended to create a level playing field, requiring large fund providers to pay GST on fees, which small providers are already doing.

"During extensive consultation, views were mixed on the merits of the technical change," he said. 

"The large companies profiting from the current set-up were opposed to the change, while smaller providers were more supportive of the change. This was because these providers who did charge the full GST on their service fees faced unfair competition from the bigger players.

"However since the announcement it has become clear that smaller providers now oppose it too."

Revenue Minister David Parker.
Revenue Minister David Parker. Photo credit: Getty Images.

After the tax revelations on Tuesday evening, there was outrage from the public and concern by tax specialists. One expert from Deloitte called the move "staggering" and a "brand new tax". The Financial Services Council chief executive said it was an overreach. 

"In the middle of a cost of living crisis, increasing taxes that are then likely to increase the fees that consumers pay to invest in KiwiSaver and managed funds, and potentially decrease returns, is a suboptimal outcome," said Richard Klipin.

Opposition parties were also in attack mode - until the U-turn was announced.

"[It's] absolutely fantastic that New Zealanders have been saved by another KiwiSaver tax, but I can tell you, you can't trust Labour on tax and this is evidence of that," said Luxon after the reversal.

It was put to Luxon that the Government says it isn't going ahead with its plan due to a lack of support from small fund providers.

The National Party leader laughed.

"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 and their KiwiSaver and their retirement incomes. It's not acceptable and it is good that it's stopped."

Luxon believes the backdown would be "pretty embarrassing" for the Government, but encourages them to "keep U-turning".

National leader Christopher Luxon and finance spokesperson Nicola Willis.
National leader Christopher Luxon and finance spokesperson Nicola Willis. Photo credit: Newshub.

Parker admitted it was slightly embarrassing. He and the Finance Minister made the decision to drop the policy.

"We would obviously have preferred that the people we thought would come out in support of this had. The fact that they haven't causes us to reverse our position. We think that was the right thing to do as the furore around this was denting public confidence in KiwiSaver."

But he suggested some public backlash was driven by misrepresentations of the tax as being of KiwiSaver contributions rather than fees. The effect on fees "would have been far lower" than changes made under the National Party, the minister told reporters.

He also defended not discussing the plan extensively with the public before the tax Bill was introduced into the House.

"We weren't expecting the backlash that we have experienced against this. We were highlighting other issues like the reduction in fringe benefit tax, the changes to GST on AirBnb and Uber."

Parker said the big winners of the U-turn were banks with large KiwiSaver funds who won't need to pay the GST.

Prime Minister Jacinda Ardern backed Parker up in saying the Government thought it was "fixing the system" for some smaller providers. 

"Here we were seeking to improve the system, iron out the uneven playing field in the way GST was applied to fees and services. But when the sector comes back and says they don't believe that's what we'll achieve, we won't do it."

During a fiery exchange with Luxon in the House, Ardern confirmed she still had confidence in Parker as Revenue Minister. 

She also attacked National's previous track record with KiwiSaver.

"What I would be embarrassed about is leading a party who once called KiwiSaver a glorified Christmas club, who opposed its introduction, who reduced the Government contribution, who have over a period of time stopped contributions to the Super Fund and done everything in their power to undermine KiwiSaver."

This latest tax debate comes as the Government also attempts to put out fires over its cost of living payment - the second of which will be delivered to Kiwis on Tuesday. Some of the first chunk of cash in early August went to foreigners and expat Kiwis overseas, but changes have been made to the screening tests ahead of Thursday's payment.