Tax changes to KiwiSaver are needed to encourage New Zealanders to start saving enough for their retirements, an AFA has told the Tax Working Group.
Drew Hoffman, an authorised financial adviser at Newton Ross, said New Zealanders were saving too little in KiwiSaver – and the lack of tax incentives on the scheme could be to blame.
He said it compared unfavourably to other countries’ structures. In the UK, contributions and fund growth are not taxed but distributions are. In the US, under the Roth option, contributions are taxed, growth is not, and distributions are not.
“Once an employee has contributed up to 3% of his or her salary, there is no incentive for him or her to contribute anymore under the KiwiSaver scheme. A contribution rate of 3% for most people is not going to result in a comfortable retirement,” Hoffman said.
“With the amount of New Zealand Superannuation likely to diminish because of population demographics, the New Zealand government needs to incentivise Kiwis to save more.”
He said the Roth option would be good choice for New Zealand.
“Income and growth on current amounts in KiwiSaver accounts would no longer be taxed and income and growth on additional contributions would not be taxed. I recommend that the limits on contributions be set at $15,000 per annum or 15%, whichever is lower, for employees under age 50. Employees aged 50 and over should have limits of $20,000 or 20%, whichever is lower, to encourage savings for those nearing retirement.”
He said the government was making money off KiwiSaver at the moment, even when the $521 tax credit for each member was taken into account.
“In the future, the amount made by the government on taxation of KiwiSaver will only increase under its current form. The New Zealand government needs to get serious about encouraging people to prepare adequately for retirement. In order to do that, it needs to give up some of its current revenue, otherwise it will have much larger problems on its hands in the future in attempting to fund New Zealand Superannuation.”
The government could drop the member tax credit.
He said employer contributions should also be increased to 5% and employees’ contributions to 7%, with the provision for employers to reduce employee pay to fund the match.
The public consultation period for the Tax Working Group generated 6700 submissions.
“I would like to thank the New Zealand public for taking part in the process and assure everyone that all submissions will be carefully considered,” said chairman Michael Cullen.
About 16,000 votes were received on the quick polls on the Tax Working Group website.
The unscientific polls revealed the majority of respondents thought the tax system needed major changes to be ready for the future.
The prospect of a capital gains tax topped the chart of important tax issues followed by funding retirement and protecting the environment.