Budget 2010: KiwiSaver tax incentive 'won't be catalyst to sign up'

The fund management industry has welcomed a drop in the tax rate for investment income on KiwiSaver schemes but says it doesn't believe it will be enough to entice more people to sign up.

The Government yesterday announced plans as part of the Budget to drop the top tax rate for portfolio investment entities (PIEs) including KiwiSaver schemes, unit trusts and other superannuation funds from 30 per cent to 28.

The change will kick in for KiwiSaver schemes from October 1 and for other investment vehicles from April next year.

Finance Minister Bill English said 28 per cent would become the standard tax rate for most savings vehicles, aligning it with the new company tax rate.

"Applying a lower and more uniform tax rate to most forms of capital income will improve the durability and integrity of the tax system. It will encourage individuals to save and companies to invest," English said.

ING head of distribution David Boyle said the changes had come as a "pleasant surprise" for the industry.

"To me it is a good outcome for current [KiwiSaver] members and an added incentive for those who haven't joined yet to do so."

But Boyle doubted it would be the catalyst to encourage more people to sign up.

Tower head of investment Sam Stubbs said it was good for the fund management industry and the PIE changes combined with the changes to loss-attributing qualifying companies (LAQCs) would level the playing field for investors.

"It's not earth shattering - that would have been compulsory superannuation or an increase in the contribution rate. But it will stop people investing so much in residential property."

Stubbs hoped that would mean more people put money into KiwiSaver and would make housing more affordable which would help first home buyers.

"It is removing the incentive to invest in lazy assets. It's taxing spending and rewarding savers. That's got to be a good thing."

Mercer New Zealand chief executive Martin Lewington said it showed the Government had recognised that saving and investment was important. He hoped it would lead to more people saving.

"People are going to be better off and I would really hope New Zealanders take the opportunity to invest the savings."

But Michael Littlewood, co-director of Auckland University's Retirement Policy and Research Centre, said it did not resolve the inconsistencies between tax on PIE income and dividend income.

"This is a signal the Government is putting that on hold."

Littlewood said all collective investment schemes like managed funds and KiwiSaver schemes should be taxed on an imputation basis.

"If people pay 33 per cent as an individual then they should pay the same on PIE income."

At the moment investors could structure their affairs to pay less tax on their PIE income than other income. "The Government still hasn't addressed that."

More than 1.4 million people were signed up to KiwiSaver as of April 30.