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Cliffe: KiwiSaver tax underpayment issues mask bigger problem

Inland Revenue needs to acknowledge that over-charging KiwiSaver members tax is a bigger problem than some not paying enough, one adviser says.

Friday, June 7th 2019, 6:00AM 3 Comments

It was revealed this week that IRD had determined 450,000 people were paying the wrong rate of tax on their KiwiSaver accounts and other managed funds.

It had written to at least 120,000 taxpayers, some of whom said they were being given bills of hundreds of dollars a year.

It said it would not pursue people for underpayment in previous years, not refund overpayment.

Its new computer systems meant it could more easily see what tax rate should be applied to PIE investments.

KiwiSaver tax is an issue that has been highlighted by AFA John Cliffe, who headed a group that wrote an open letter last year outlining major problems with the retirement savings scheme.

One issue highlighted by the letter was the fact that people who enter a default KiwiSaver scheme are assigned a tax rate of 28%, even though they might be meant to pay only 10.5% or 17.5%, depending on their income in the prior year.

The letter noted that while the IRD supplied default KiwiSaver funds with default members' account details, it did not give them the tax rate. Unless a fund was able to confirm it direct with the member, they were stuck on the maximum rate.

Cliffe said the IRD should be compelled to give tax rate information to KiwiSaver providers for all members.

He said the reason the IRD was backing away from seeking underpaid tax in previous years was probably because overpayment was more of an issue.

The IRD said it could not speculate on that.

Cliffe's colleague, Rachelle Bland, has launched a petition "to fix KiwiSaver tax".

She said the major drawback with default enrolment was that there was nowhere on the form for an employee to enter their ta rate.

"Rather they get taxed at the highest rate of 28% until they advise their KiwiSaver provider otherwise. This can only happen after the end of the three month opt in period. To make matters worse, there is no way for overpaid tax to be refunded as KiwiSaver tax is a final tax."

She said it had been an issue since 2007 and the youngest, least financially aware members were the most affected.

Tags: KiwiSaver tax

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Comments from our readers

On 7 June 2019 at 8:50 am NormanStacey said:
A deceptively smart fellow, that John Cliffe!
On 7 June 2019 at 10:10 am Elephant1 said:
Lack of proper monitoring of our nation's kiwisaver funds is a major problem . The $9 billion in default funds should not be allowed. The failure to keep with with inflation for the taxation regime is another problem. But for the average investor, they need regularly monitoring , and this is not being done. There just is not enough advisers and , the question , I ask will this change.?
On 7 June 2019 at 1:28 pm Rachelle Bland said:
Just to clarify, my petition to Parliament is to change section 22 of the KiwiSaver Act so that the KS2 and KS1 forms are updated to include a member’s PIR rate. That way auto-enrolled members will be taxed at the rate that they nominate right from when the enrol, rather than being taxed at the default rate of 28% until they advise their provider otherwise. The default KiwiSaver rate disproportionately affects low income earners and young people starting their first job. It’s usually a person’s first financial asset and they probably know very little about KiwiSaver.
As AFAs, and as an industry we need to do better for all New Zealanders.

The IRD has been silent on this issue since KiwiSaver started. They’ve known about the issue yet missed a great opportunity to have the form updated in April for the new contribution rates. Similarly the KiwiSaver providers spend a lot of time chasing members for PIR rates and they too have not demanded change. Moreover, in discussions I’ve had, there seems a reluctance by KiwiSaver providers to update the members’ PIR rates based on information they receive from the IRD. This should be the norm. My petition seeks to place an ongoing obligation on the IRD to update KiwiSaver providers with members’ PIR rates. Providers should be able to use this information to update their records and notify the member of the action taken. If the member has an issue, they can take it up with the IRD.

Please sign my petition at the link below. We need as many people as possible to sign to force change.
https://www.parliament.nz/en/pb/petitions/document/PET_87828/petition-of-rachelle-bland-stop-taxing-auto-enrolled-kiwisaver

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