Researchers: Re-think PIE regime

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Government should level the tax playing field for all savings and savings-related investment vehicles, not allow the PIE regime to provide unnecessary incentives for high-earners, two researchers say.

Monday, November 5th 2018, 6:00AM 1 Comment

The Tax Working Group is developing a final report on its recommendations for the future of tax policy.

It has recommended removing tax on employer KiwiSaver contributions for people earning up to $48,000 and a five percentage point reduction in the lower PIE rates for savings in KiwiSaver accounts.

Pension researcher and founder of SuperLife Michael Chamberlain has since analysed recent data on all KiwiSaver schemes published by the Financial Markets Authority. 

He said returns for the 12 months to June 30 illustrated the TWG’s recommendation on investment returns would have made little difference for the lowest-paid savers.

“Of all the ‘balanced’ funds at  June 30, the average return before tax but after fees was 9.15% for the 12 months. 

"After tax at the top PIE rate of 28%, the average net return was 8.48%.  In other words, the highest-paid KiwiSavers paid a tax rate of just 7.36% on their investment returns, compared with 33% on their other taxable income.  That was a huge tax advantage for the highest paid.

“Cutting the middle PIE rate from 17.5% to 12.5% for a 17.5% taxpayer, as the TWG recommends, would have meant an increased after-tax return of 8.85% instead of the 8.73% return they actually received; practically no difference at all.”

Chamberlain said the issue should be removing the current tax favours for the highest paid, in the light of the international evidence that they did not work.

“Tax breaks for retirement are very expensive, distortionary, inequitable, regressive and demand high, growing regulatory walls around affected assets, to ensure the incentives are not ‘misused’.  But worst of all, tax incentives seem not to raise overall savings.  That’s also likely to be the case for KiwiSaver but we need to find out.  The TWG hasn’t bothered to do that.”

Chamberlain and colleague Michael Littlewood’s submission suggested that instead, the TWG should level the tax playing field for all savings and savings-related collective investment vehicles, so that everyone paid their appropriate amount of tax and tax did not distort an individual’s behaviour.

Chamberlain said there should be no tax advantages for any vehicle over another vehicle.

"People should have to pay tax at their correct marginal rate. Any tax system that encourages people to change behaviour for tax reasons is wrong.  The PIE regime that confers a 5% advantage on the top taxpayers is wrong.  The PIE regime is also wrong as if you qualify one year for a 10.5% tax rate you keep it for two years irrespective of your income in the second year.  Likewise if you have a 28% tax rate and you retire and go down to minimal taxable income you have to keep the 28% rate for at least a year.

"If I buy NZ/Aussie shares directly and hold them long-term - ie not trade - I pay 33% tax on the dividends.  If I trade them I pay 33% tax on the gains as well.  If I do the same through a PIE vehicle I only pay 28% tax and do not have to pay tax on the capital gain.  There is no logic to this from a ‘fairness’ text."

Littlewood said there was an underlying assumption that needed to be challenged. "What is it about retirement saving that deserves this special treatment?  That’s what should be addressed before we start analysing the different tax treatments of different saving instruments.

"What is it that the government knows about retirement saving in particular that deserves special treatment?  Where is the evidence that New Zealanders need help to understand whatever it is that the government seems to know and that we savers do not know?"

Tags: PIE tax tax working group

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