Campaign to reduce tax on savings

KiwiSaver on average wage said to be losing $100,000 over 40 years through overtaxation.

The Financial Services Council is looking to drum up popular support for a campaign to address what it says is the overtaxation of savings.

Age Concern, Consumer New Zealand and the Taxpayers' Union are also backing the campaign.

They argue that every dollar of tax collected on the earnings someone's savings generate while entrusted to fund managers is a dollar less reinvested to generate compound interest for the saver.

The cumulative effect - depending on how long people save and their marginal tax rate - can be effective tax rates much higher than they pay on other income.

"Someone in the 33 per cent tax bracket loses 54.7 per cent of their KiwiSaver earnings to the impact of tax over 40 years," said Financial Services Council chief executive Peter Neilson.

And someone in KiwiSaver on the average wage saving a typical 6 per cent of income for 40 years would have a nest egg more than $100,000 larger if the overtaxation was fixed, he said.

The campaign also wants only the real or after-inflation component of interest paid on term deposits in banks to be taxable.

Term deposits are a preferred investment vehicle for many older New Zealanders, according to Age Concern chief executive Robyn Scott.

Jordan Williams of the Taxpayers' Union said taxing nominal rather than real interest was taxing income people never got to spend.

The Savings Working Group back in 2011 called for only real interest income to be taxed (and for only real interest costs to be deductible).

It also recommended portfolio investment entity (PIE) tax rates be cut to levels 5 to 10 percentage points below investors' marginal tax rates.

"As the Savings Working Group observed, the current tax system discourages saving and incentivises indebtedness and investment in real estate rather than more productive investment," Neilson said.

The council expects to release analysis of the fiscal effects of the proposals within a few weeks.

The two million people in KiwiSaver and the 750,000 with term deposits are being invited to sign online petitions at www.fairtaxforsavers.org.nz or send a postcard or email to their MP or the leader or finance expert of the party they back.

It would be the most polite, non-partisan, evidence-based request for change in the nation's political history, the former Revenue Minister said.