The debacle surrounding KiwiSaver fee tax is a cautionary tale in allowing confusion to scuttle sensible (and highly technical) policy making. Cartoon / Rod Emmerson
OPINION:
Last week saw the announcement, media firestorm and subsequent abandonment (all within 24 hours) of a cornerstone component of the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill. Voters, egged on by the media, accused the Government of robbing their savings by "taxing" KiwiSaver.
The bigger picture was about different retirement fund managers charging inconsistent rates of GST and the question of fairness between those competitors, but somehow the debate was moved to the rapacious tax gathering quality of government. In any event, although the government has heard the message and reversed its decision, the larger question of how much tax and who pays it remains for another day. We suspect it will be most days of next (election) year.
The proposals were never a tax on KiwiSaver balances, profits, returns or anything else. It certainly was never an increase to the existing managed funds and KiwiSaver tax regimes. New Zealand has had these tax settings in place for many years, and they are quite tough by international standards. Instead, as indicated, the proposals were to consistently apply GST to the managers' fees charged by managed fund services.
It is the fund manager's fee to which GST was to be charged. To understand why this makes sense, we need to understand what GST is and how it attaches to "goods and services" offered in our economy. The legal question we need to answer is whether a fund manager is providing a service to their customers. The law regards the contractual service as being supplied to you as a recipient of financial advice services.
The key question is whether the supply of fund management services is a financial service, as "financial services" are GST-exempt supplies. Different fund providers have arrived at different answers to this question: New Zealand-based providers found they had to pay, the Australian banks found they did not. All these different answers and resulting differences in GST treatment were why the IRD proposed changes in the first place. Let's evaluate the arguments for and against managed funds providing a financial service.
First, we must look to s 3(1) of the GST Act, which sets out an exhaustive list of financial services activities. One of these activities seems relevant:
• The provision, or transfer of ownership, of an interest in a retirement scheme or the management of a retirement scheme;
On its face, it looks to be totally excluding the activity of retirement schemes from the GST Act. However, we must read "the management of a retirement scheme" in the context of s 14, which defines exempt supplies, whilst considering the specific supply in issue (as defined in s 5). The law can get weird!
Here, the supply is the supply for which the management fees provided consideration. BNZ says, "part of the management fee is used to pay our investment managers for their time and expertise". In other words, the service fees are consideration for the fund manager's expertise and investment advice. This makes sense as consumers go with fund managers because they lack the expertise to invest. The question is whether such advice relates to the "management of a retirement scheme", especially in the presence of s 3(1)(l) that explicitly excludes advising from the definition of financial service.
The core argument against fund management fees being a financial service is that the fee is paying for the fund manager's advice and expertise in managing the investment fund. Section 3(1)(l) explicitly excludes advising from the definition of financial service.
So, is the supply by fund managers in consideration of the management fee a form of investment advice? Intuitively this is what we think we are paying for. We use fund managers to access their advice, consolidated holding of investments and portfolio management. In consideration for which we pay a management fee.
Treating fund management fees as within the scope of GST (and not a financial service) is consistent with other jurisdictions that adopt a broad-based GST system like ours. Notably, the changes were intended to align our approach with Australia's, which has levied GST on fund management fees for some time (and still has lower fees than ours).
The Bill was not needed: legally, fund management fees should have already been subject to GST. The Bill did not make new laws; it merely declared law that already existed. Law found in a robust application of the standard GST test we have just worked through.
The public commentary around the proposed changes centred on another misunderstanding. In this case, one totally unrelated to the primary legal question: how Regulatory Impact Statements (RIS) are to be interpreted and what their modelling results mean.
The headlines read, "Another $186bn taken from the future". These headlines focus on FMA analysis which found that the changes would, ceteris paribus:
• Reduce the amount of KiwiSaver FUM by $103bn out to 2070; and
• Reduce the amount of non-KiwiSaver FUM by $83bn out to 2070.
The implication of this is startling. The Government is taking $186bn from future generations to provide a bit extra ($272m a year from 2026) tax revenue for the present. And all by a sleight of hand in an otherwise unremarkable bit of omnibus legislation. The National Party extended the implication further, suggesting the Government's silence on the changes was active deception designed to disguise profligate spending that rots the Beehive to its core.
Taken literally, this all sounds reasonable. The RIS did include these figures, and they are accurate. However, the modelling was based on the most standard of assumptions: that all else remains equal. This assumption means the modellers assumed that the total value of GST would be passed on to consumers.
But assuming all else remains equal seldom accords with reality. Instead, there is likely to be a competitive response by other fund managers when GST comes on in 2026. We must remember some providers are already paying GST and have factored the tax into their existing (competitive) fees. Those firms would likely face an enhanced ability to compete post-2026 as they have already built the tax into their cost base. Had the Government not walked back the changes, it is likely some providers would announce they would absorb the GST increase into their existing fees. The FMA's modelling (rightly) did not capture this competitive effect.
Secondly, we must talk about big numbers. Any reasonable person hearing that these changes will cause $186bn to be stripped out of their hands would be rightfully concerned. But this $186bn is not actual money, nor is it represented in today's dollars. It is a projection for 2070, when the overall asset base will have risen. It is worth remembering these projections assume KiwiSaver balances of $2.1969 trillion in 2070. KiwiSaver balances are currently $87.299 billion – or 4 per cent of the projected 2070 values. Phrasing the numbers in context gives a clearer, less emotive indication of what is happening.
Thirdly, the RIS did not consider the broader benefits that increased Government investment (enabled through a $257m a year increase in the tax take) might have. Anyone involved in the policy world will know this is not the job of a RIS: it cannot model the interactions of the whole economy. Instead, New Zealanders have grown accustomed to a small-government neo-liberal ideology that views Government spending as a negative that takes money from people's back pockets. A more mature conversation would recognise the potential smart Government spending has in unlocking economic growth, lifting living standards and promoting genuine intergenerational wellbeing in a way that individuals cannot.
Finally, it is worth reflecting on who is facing the tax burden here. Helpfully, the Minister did provide a suggestion: the big Australian Banks. These providers are disproportionately choosing to exempt themselves from GST (whilst several smaller New Zealand providers already pay GST). We know the Australian Banks extract exorbitant profits: in 2019, with pre-record profits, the Australian Banks sent $580,000 an hour of profits back to Australia.
The debacle surrounding this tax is a cautionary tale in allowing confusion to scuttle sensible (and highly technical) policy making. The debate became dislodged from the technical details of the tax treatment of fund management fees. Instead, it became entangled in broad-based public opposition to any perceived tax increases.
What should have been a technocratic reform intended to support broader Government efforts to improve competition in the KiwiSaver/managed funds sector fell victim to political soundbites and confusing language of a tax grab. The media, which should be expected to communicate proposals accurately, got caught up in the spin and contributed to a manufactured outrage.
This is not to say the Minister doesn't have his fair share of the blame. The Minister thought these changes were minor and would not be politicised. After all, he never mentioned these changes in his press release for the wider Bill. Clearly, he was wrong.
Instead, backlash appears to have been mainly generated by the visceral reaction of median voters feeling that more of their savings was subject to a Labour tax grab. New Zealanders have a weak conception of what we can accomplish through unlocked government investment in our future generations. Instead, we get lulled into a status-quo that benefits the Australian banks who charge exorbitant fees and starve our economy of non-property capital.
If Aotearoa is unable to have any discussion on minor tax changes, we have little hope of mobilising the social resources needed to tackle our significant challenges of climate change, housing, child poverty and racial inequity. It is time to follow the wero of the Tax Working Group and have informed, considered discussions about what tax policy means for our collective futures.
Naku te rourou nau te rourou ka ora ai te iwi
Craig Elliffe is a lawyer and Professor of Tax Law at the University of Auckland Law School.
Henry Frear is a researcher at the University of Auckland focusing on economic regulation and public policy.
Westpac's conduct affected a total of 24,621 customers.