Levying GST on KiwiSaver and managed funds fees could slice $186 billion from New Zealanders' saving balances by 2070.
A proposal to add 15% GST to services supplied by investment managers to managed funds and retirement schemes was introduced to Parliament on Tuesday by revenue minister David Parker, under the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill.
In a briefing paper to Parker, the Inland Revenue Department (IRD) has proposed repealing an existing GST exemption for the management of a retirement scheme to ensure certainty and consistency in the treatment for management services, and "simplify" compliance.
The IRD estimates that if the bill becomes law, it will collect $225 million per year from April 2026, and accepts that this cost will flow through to retail investors in the form of higher fees.
That will also have the effect of reducing 'after-fee' returns and therefore the total amounts that are reinvested and saved over time.
Modelling by the Financial Markets Authority (FMA) shows this option will lead to KiwiSaver fund balances, of $2.2 trillion, being reduced by $103b by 2070. Fund balances for non-KiwiSaver managed funds of $1.67t, would be lowered by $83b.
There are more than 1,000 funds currently on offer to retail investors.
In a note, law firm DLA Piper said the move is a "significant departure" from current practices and will have an impact on managers, investment managers and the funds they manage.
DLA Piper said that, as drafted, a manager or an investment manager will be able to fully recover GST at 15% on their management costs, although managed investment schemes may incur a greater GST bill that is passed to them from their manager and/or investment manager.
Under IRD modelling, an investor with $100,000 invested in a fund charging a 1% fee would pay a $1,000 annual fee as it stands.
Under the proposed reform, that annual fee could increase by up to $96, to become $1,194 for the first year after the reform. And after 25 years of regular contributions, the investor who built up a $862,308 balance under the current tax settings, would pay $21,179 extra in tax, leaving them with a balance of $841,128.
Investors in such schemes already pay tax through the portfolio investment entity scheme, where investment income is taxed at a slightly lower rate than income tax.