KiwiSaver: Understanding How Your Investments are Taxed
Prime Minister Christopher Luxon has stated that National won’t be introducing a capital gains tax (CGT), despite calls from Labour’s finance spokesperson Barbara Edmonds who accused the party of being “afraid” of such a policy. Although recent polls suggest support for some form of CGT, Luxon argues that it would impact not just property investors but also small business owners and KiwiSaver contributors.
However, many people may be surprised to learn that KiwiSaver returns are already taxed. Unlike some overseas superannuation schemes, KiwiSaver contributions are made from taxed income and investment returns are subject to tax as well. Let’s break down how KiwiSaver investments are taxed:
Income You Invest is Taxed
While the amount you contribute to KiwiSaver is based on a percentage of your before-tax income, this contribution is made from your already taxed income.
Your Employer’s Contribution is Taxed
Your employer also pays employer superannuation contribution tax (ESCT) on their contribution, unless the contribution is being treated as wages and is taxed under the PAYE rules. The government collected nearly $2 billion in ESCT in the year to June.
Your Returns are Taxed
The big point to remember is that your KiwiSaver returns are subject to tax. You only pay tax on the returns, not the entire balance. Most KiwiSaver schemes, and all the default providers’ schemes, are portfolio investment entities (PIEs). In these funds, the amount you pay in tax (your prescribed investor rate or PIR) depends on your income and could be 10.5 percent, 17.5 percent or 28 percent. You can use Inland Revenue’s calculator to check you have the right PIR rate. If you haven’t told your provider differently it’s likely that you’ll be paying 28 percent.
Barbara Edmonds.
Photo: RNZ
How individual investments are taxed depends on the area in which they are held. In New Zealand and Australia, there is no tax on capital gains in shares, just the dividends. However, investments in international shares are taxed under the foreign investment fund (FIF) rules. This means that each year, 5 percent of the value of those investments at the start of the year is counted as your income from that investment, and taxed at your PIR. You can end up paying tax on dividends and through the FIF scheme even if the fund has not delivered a positive return in the year.
This financial arrangements regime applies to bonds and overseas currency accounts and taxes interest and capital gains on bonds, including movements that are due to currency fluctuations.
Tax collected by your fund manager is handed to Inland Revenue on your behalf.
Withdrawals Are Not Taxed
Finally, when you withdraw your money from KiwiSaver – whether that’s for a first home, hardship reasons or when you retire – it is not taxed.
Want to learn more about managing your KiwiSaver investments? Contact a financial advisor today.