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Proposed Capital Gains Tax on KiwiSaver investments good news for lower income Kiwis

Simplicity Research, a division of Simplicity NZ Ltd, has calculated the impact of the Tax Working Group recommendations on the average KiwiSaver member at retirement. These are our findings below.

If all four recommendations (outlined below) are implemented, a member earning $40,000 p.a. and contributing at 3% of salary will have between $80,125 and $108,932 more in their KiwiSaver account at retirement. 

For someone earning $70,000 p.a. and contributing at 3% of salary, the KiwiSaver member balance at retirement will be between $841 lower and $7,307 higher.

For someone earning $100,000 and contributing at 3% of salary, the balance will be between $13,536 lower and $274 higher.

Assumptions:

  • An investor starts at age 20, earns either $40,000, $70,000 or $100,000 per year and has contributions of 6% (3% employee and 3% employer).
  • Their salary increases by 1% per annum.
  • Their starting balance is $0.
  • They retire at age 65. 
  • The capital appreciation from NZ Shares that would be subject to CGT is 3.8% p.a. (based on 20-year data).
  • The capital value from Australian shares that would be subject to CGT is 3.6% p.a. (based on 20-year data).

 

The key recommendations of the Tax Working Group (TWG) for KiwiSaver members were:

1) Elimination of tax-free capital gains on NZ and Australian shares. 

Assuming no changes to current asset allocations, this would reduce returns for all KiwiSaver members. The impact on KiwiSaver growth fund returns is estimated at -0.30% p.a., and -0.20% p.a. for balanced funds. 

 

For the average KiwiSaver investor on a salary of $40,000 and contributing at 3% their whole working life, the reduction in returns is $34,170 and $18,047 respectively. 

 

For someone earning $70,000 and contributing at 3% of salary, the negative impact will be a $36,876 and $20,406 respectively.

 

For someone earning $100,000 and contributing at 3% of salary, the impact will be a reduction of $49,570 and $27,438 respectively.

 

2) A 5% drop in the PIR tax rates for 10.5% and 17.5% PIR investors. 

 

The new rates of 5.5% and 12.5% would improve KiwiSaver fund returns for those earning less than $70,000.

For the KiwiSaver member on a salary of $40,000, the impact is positive and the gain is $65,368 for a growth fund and $40,671 for a balanced fund.

 

3) Removal of the current Employer Superannuation Contribution Tax (ESCT) for those earning under $48,000.

 

This benefits a member earning under $48,000, with no change for those earning more.

For the KiwiSaver member on a salary of $40,000, the impact is $33,871 for a growth fund and $25,268 for a balanced fund 

4) The government tax credit contribution to increase from 50c per $1 invested up to 75c per $1 (up to a member contribution level of $1,042).

 

All KiwiSaver members receive an additional benefit of $260 per annum assuming they meet the minimum contribution threshold of $1,042 via either employee or voluntary contributions.

When adding the increased member tax credit to the portfolios and projecting out 45 years, there is a marginal benefit in the difference between the new portfolio value versus the status quo for a lower income earner.

The small benefit for a $40,000 income earner is due to the lower tax rate applied to their portfolio compared to the higher income earners.

Combined Impact:

Assuming all changes come into effect, the impact of the various components is summarised below:

 

Growth Fund

Income
Level
Employer Superannuation
Contribution Tax removed
Prescribed Investor
Rate reduced from 17.5% to 12.5%
Capital Gains Tax
introduced
Member tax credit
increased
Net impact

$40,000

$33,871

$65,368

($34,170) 

$43,861

$108,932

$70,000

no benefit

no benefit 

($36,876) 

$36,034

($841)

$100,000

no benefit

no benefit

($49,570)

$36,034

($13,536)

  

Balanced Fund

Income
Level
Employer Superannuation
Contribution Tax removed
Prescribed Investor
Rate reduced from 17.5% to 12.5%
Capital Gains Tax
introduced
Member tax credit
increased
Net impact

$40,000

$25,268

$40,671

($18,047) 

$32,233

$80,125

$70,000

no benefit

no benefit

($20,406) 

27,713

$7,307

$100,000

no benefit

no benefit

($27,438)

27,713

$274

 What the calculations show is that lower earning KiwiSaver members significantly benefit from the suite of proposed changes, with little or no benefit for higher income earners.

 

 

 

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