KiwiSaver tax: Officials suggested sweeteners for Kiwis to soften blow of GST costs, ministry had concerns about changes

Officials suggested the Government could offer up sweeteners to Kiwis to soften the blow of extending GST to KiwiSaver managed fund fees.

But Revenue Minister David Parker says no work was ever done on the ideas - such as increasing government KiwiSaver contributions - and wouldn't have until revenue started rolling in.

That won't happen, however. When the plan went public, there was outrage it could lead to reduced KiwiSaver balances and the proposal was scrapped. One criticism was that it was just a revenue-grabbing initiative, with an additional $225 million in GST set to be gathered annually from 2026 when the changes were meant to come into force.

It also turns out that the Ministry of Business, Innovation and Employment (MBIE) weren't too keen on the idea, saying changes risked "undermining the positive impacts of recent Government efforts to ensure value for money with KiwiSaver".

Newly released papers reveal how the plan came about, with Inland Revenue and Treasury in April presenting the Finance and Revenue ministers with different options on how to apply GST to managed fund fees, including KiwiSaver funds. 

Officials recommended applying 15 percent GST to all managed funds service fees to create a more "even playing field" between large managers and smaller, boutique groups, some of which are already paying the tax. However, it was acknowledged that this "would lead to higher fees for savers" as managers would likely just pass on the costs.

"We consider these costs can be mitigated by options considered further below and that the benefits of this option will outweigh these costs," the tax policy report said.

"If Ministers are concerned about the managed funds fees increasing because of applying GST, then we recommend considering non-GST options for supporting savers."

The paper said this could include an "explicit fee subsidy or increasing the Government contribution". Officials weren't in favour of making GST concessions. 

"Such options could also be better targeted to benefit savers with smaller balances (as opposed to GST concessions, which would produce the most benefit for savers with large balances)."

The paper said Treasury recommended ministers "consider these options alongside your wider fiscal and other objectives". 

"The revenue from our preferred policy option…could, for instance, be used to increase spending or reduce taxes in other areas and this should be compared alongside options to support savers."

The document also reveals MBIE had concerns about the changes.

"MBIE supports the aim of having a consistent GST system and the benefits this may have for competitive neutrality and lower compliance costs.

"However, increased fees and lower net returns for retail investors as a result of additional GST will lead to decreased retirement savings being available to savers in the future, including KiwiSaver members. 

"This outcome risks undermining the positive impacts of recent Government efforts to ensure value for money with KiwiSaver and that the benefits of economies of scale in the funds management sector are being passed to consumers in the form of lower fees."

Revenue Minister David Parker.
Revenue Minister David Parker. Photo credit: Newshub.

Nicola Willis, the National Party finance spokesperson, called it a "complete mess".

"Officials gave ministers a very clear warning, if you do this, you will reduce New Zealanders' retirement savings," she told Newshub on Tuesday.

"They warned them if they were going to do it, they would need to find some way of fixing that. Ministers ignored the advice. They pressed play on the tax with no plan to recover the savings."

Parker told Newshub ministers didn't ignore the options to soften the blow of costs. He said that could have been worked on down the line. That won't happen now the plan's been dumped. 

"It could have been the outcome, but we hadn't done work on it because it was some years away," he said.

"We hadn't done any policy work on developing them up and we wouldn't until after we had that revenue ensured into the future."

Willis said that was "typical Labour". 

"Tax first, answer questions later."

Parker denied the plan was a revenue-grab as it wasn't scheduled to come into effect for years.

"If it was a revenue-grab, we would have done it overnight."

National finance spokesperson Nicola Willis.
National finance spokesperson Nicola Willis. Photo credit: Newshub.

View of stakeholders

The papers, released last Friday, show the Government did look to mitigate transitional costs for managers to allow time "to amend their IT systems, adjust their business practices and replace or renegotiate commercial contracts". 

"A shorter transitional period, such as 12 months, would have a fiscal benefit of collecting GST revenue sooner, but we would recommend against this as it could impose much more disruption to the managed funds industry and associated implementation challenges and transitional costs," officials said. 

Parker eventually ended up agreeing to a 36-month transition period, with the new plan not meant to come into effect until 2026.

Modelling from the Financial Markets Authority showed the Government's plan could have led to KiwiSaver balances being reduced by $103 billion by 2070.

But a Cabinet committee document from Parker said it was unclear how much of the increased fees would be passed onto investors. 

"Stakeholders have mixed views on the level of fee increase as a result of the GST change," the paper said. 

"The large managed fund providers (that are currently 90 percent exempt / 10 percent taxable) represented by the Financial Services Council believe the full GST cost will be passed through to retail investors, whereas the boutique funds believe the additional GST cost may have little impact fees charged to retail investors due to increasing pressure to compete on investor fees."

An assessment of stakeholders' overall views showed officials' preferred option - which the Government eventually went forward with - was large funds' "least preferred option as it would require them to shift from a fully exempt or 90 percent exempt treatment to 15 percent GST applying to all fees". They wanted the status quo. 

Meanwhile, smaller funds "consider the proposal to be their most preferred option as it provides a level marketplace with their competitors".

The Government didn't see support from small managed fund providers.
The Government didn't see support from small managed fund providers. Photo credit: Getty Images.

But those smaller providers didn't come out strongly in support of the plan when it became public in August. Instead, the reaction from the Opposition and tax experts was overwhelmingly negative.

The National Party called it "yet another tax grab", while an expert from Deloitte labelled 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.

Within hours, the proposal was dead

"We would obviously have preferred that the people we thought would come out in support of this had," Parker said.

"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."

The minister suggested some public backlash was driven by what he believed were misrepresentations of the plan as being a tax on KiwiSaver contributions, rather than fees. 

Parker also defended not discussing the plan extensively with the public before it was introduced into the House as part of a larger tax Bill. 

"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."

The Government had to withdraw the Bill and reintroduce it in September with the GST managed funds change removed. 

While the last National Government made changes to KiwiSaver, including slapping a tax on employer contributions and ditching the $1000 kickstart, Willis has ruled out making changes to it if she were Finance Minister.