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Tax changes could affect KiwiSaver

2 October 2006

TOWER Investments: Tax changes could affect KiwiSaver

With more changes to the Government's proposal on the taxation of investment income, TOWER Investments says that it is important that critics don't lose sight of its main goal, to encourage a long-term savings habit and asset accumulation among New Zealanders and remove tax considerations from the investment decision. The proposed legislation was created to provide a level playing field for investors, something that TOWER Investments CEO Tony Hildyard says is "for all the right reasons".

Recent amendments to the proposed legislation have sparked some debate in the industry. There is a feeling that these changes will have serious implications for the industry and may not work with existing legislation.

Mr Hildyard said that while TOWER Investments supported the changes in the main, he agreed that there were several areas that would need to be addressed.

"Since the tax bill was introduced back in May, TOWER has supported what it's trying to do. If it's implemented in the right way, I think it will deliver on its promise of fairer tax regime for all New Zealand investors," Mr Hildyard said.

Mr Hildyard said that the latest amendments regarding offshore investments had changed the proposed legislation significantly, by reintroducing different tax treatments for those who invested through managed funds compared with those who invested directly.

These amendments would see managed funds paying taxes under a "fair dividend rate" based on 5% of the opening rate value, whether or not the investment made a profit, while direct investors would pay a maximum of 5% but only to the extent that the investment was profitable. Mr Hildyard believes this aspect restores a tax-created disparity between managed funds and direct investors, may disadvantage managed-fund investors, and could compromise the objectives of the Government's work-based savings scheme, KiwiSaver (which starts on 1 July 2007). TOWER also believes that the 5% rate is too high and will have other unintended consequences if it is not addressed.

"KiwiSaver is a great initiative for New Zealanders and it does require a change to way most people think. It's an education process and the prospects for the KiwiSaver scheme were significantly enhanced by the Government's recent announcement of a tax break for employer contributions. However, this enhancement could be overshadowed if KiwiSaver investors consider they are disadvantaged compared with direct investment,” Mr Hildyard said. “There are two issues here - we want KiwiSaver to get off to the best start possible, and we don't want to see an industry where people choose investments solely on the basis of tax."

Mr Hildyard said that KiwiSaver was an important initiative for the country, and that some more clarity was needed. People need to see it is "fair", if it is to be embraced by the New Zealand public.

"In short, KiwiSaver is a managed fund, and as such it should provide investors with all the benefits that managed funds offer (diversification, scale, regulatory protection, professional management) without having to jump an additional tax hurdle compared with direct investment.

"KiwiSaver's success really does depend on that 'level playing field' we've been talking about. Our main concern is that if the legislation did go through in its current state, we still wouldn't have solved the problem of inequity in the industry. These are important issues that we believe need further consideration at a Select Committee level to ensure the best long-term outcome for New Zealanders."


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