Call for changes to investment tax rates

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Mercer is calling for changes to tax rates as record numbers of people sign up to KiwiSaver.

Friday, June 13th 2008, 7:31AM

As at 31 May, 673,942 New Zealanders were members of KiwiSaver. Over 70,000 of these members joined during the month of May, nearly equalling the pace set during April when numbers soared after the introduction of employer contributions and tax credits.

"KiwiSaver has shattered expectations from day one," Finance Minister Michael Cullen said. "270,000 New Zealanders were expected to sign up after the scheme's first 12 months - 11 months in that number has been exceeded by over 400,000.

"It is especially gratifying to see so many young New Zealanders starting a savings habit as a result of KiwiSaver. Over 180,000 KiwiSavers are under 25 years-old - no one would have predicted that a year ago.

"New Zealanders know that KiwiSaver makes saving for retirement easier than ever before. We could easily see over three-quarters of a million KiwiSavers by the end of winter."

Meanwhile Mercer is warning that investors will end up being overtaxed again, once personal tax rates are changed.

In the Budget the government announced a plan for tax cuts.

Mercer is urging the Government to consider the introduction of a standard taxation rate on investment earnings within KiwiSaver and other PIE investments to make them more tax efficient savings vehicles.

Currently, all KiwiSaver schemes are or invest in PIEs, in which investment earnings are taxed at either 19.5% or 30%, depending on the saver's tax rate. Under the changes announced in the budget many lower income earners will now have a personal tax rate below 19.5%.

"Standardising the tax rate at 17% - which is a weighted average of the new 12.5% and 21% tax rates post 1 April 2011- or lower will make KiwiSaver more attractive for people to join," O'Brien says.

"It would also encourage people to transfer savings from non-superannuation assets and traditional superannuation to KiwiSaver. This could have a profound effect on the savings habits of New Zealanders to use KiwiSaver as their primary retirement savings vehicle. Further, it will simplify the KiwiSaver tax and PIE tax within in it, whilst reducing the scheme's costs as a whole.

"Standardising the tax rate would benefit investors, investment managers and scheme operators," he said.

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