IRD 'morally wrong' for not paying $42m tax back, says financial adviser

The Inland Revenue has found 1.5 million Kiwis paid the wrong tax on their investments in the last tax year. Photo / 123RF

A financial adviser has slammed the tax department for incompetence and says they are making a "morally wrong" decision by not paying out $42 million to Kiwis who have over paid tax on their investments, including KiwiSaver.

But the Inland Revenue says the system it used before April did not allow it to work out which prescribed investor rate people should be on and current law is stopping it from paying that money out.

Revenue minister Stuart Nash has said he will look into changing the law to allow overpayments to be refunded in the future but the onus has been on individuals to make sure they are paying the right investment tax rate.

This week the IRD revealed an estimated 1.5 million Kiwis were on the wrong prescribed investor rate in the year to March 31, resulting in 950,000 people overpaying tax on their investments and 550,000 underpaying.

While the 550,000 will have to pay the tax owed estimated to be an average of between $80 to $90 per person adding up to a total of between $45 million to $50 million, the 950,000 who are owed an average of $44 each won't be refunded the $42 million they have overpaid because the current law doesn't allow for it.

Rachelle Bland, an Auckland financial adviser, said the situation was an appalling indictment of the Inland Revenue Department.

"The problem of overpayment of tax has been around since 2007 and in part was created by the IRD forcing all auto-enrolled [KiwiSaver] members into the highest tax bracket."

A person automatically enrolled into KiwiSaver through starting a new job is put on the top tax rate of 28 per cent and must tell their provider three months later if they should be on a lower rate.

Bland was one of nine advisers who wrote to finance minister Grant Robertson and Commerce Minister Kris Faafoi and regulators last year warning them that many of the lowest income earning KiwiSaver members were paying tax at the highest possible rate of 28 per cent when they should have been taxed at 10.5 per cent or 17.5 per cent.

Revenue minister Stuart Nash.

At the time Robertson's office acknowledged it had received the letter but said minister Faafoi would be responding to it.

In a letter dated June 8, 2018, Faafoi said issues about the prescribed investor rate did not fall within his portfolio but he had raised concerns with the tax department.

Bland said while the tax problem might have been an oversight at the time when it was set up in 2006 it was "totally appalling" that it had been left unfixed for 12 years.

"It is morally wrong this year for the IRD to be collecting on underpaid but not refunding overpaid tax."

Sharon Thompson, Inland Revenue deputy commissioner, said yesterday its system did not allow for it to calculate a person's prescribed investor rate until it had switched to a new system in April.

She said the new system now allowed it to group together all the income people received including wages, salary and investments which enabled it to see if people were on the right rate relative to their income level.

"In the past our old system did not do this automatically and we relied on people and their investment providers to make sure they were on the right rate."

Inland Revenue commissioner Naomi Ferguson. Photo / Mark Mitchell

Thompson said it had made a business decision not to go back beyond the last tax year because it would have required significant work not just for Inland Revenue but for individual taxpayers and financial institutions.

The current legislation did not allow for refund of overpayment.

Bland said hiding behind the idea that the law does not allow them to collect a member's PIR, or refund the overpayments, and blaming their internal system's capabilities showed a "mind-numbing level of incompetence".

"This is a systemic failure by a Government department, and a failure by the KiwiSaver providers to engage with the Government/IRD to ensure this ballooning problem was resolved earlier."

Bland wrote to 24 KiwiSaver providers last month asking them to back a petition she launched to try and fix the KiwiSaver tax issue but received responses from just 12.

She said of the 12 eight agreed it was a serious problem but they preferred to take it up directly with the IRD while only three made supportive comments and suggestions.

"The fact that 50 per cent did not bother to respond shows a really low level of willingness to act in their members' interests," she said.

Andrew Bayly, National's spokesman for tax, said it was "patently unfair" that those who underpaid had to pay tax while those who overpaid got nothing back.

Andrew Bayly, National's tax spokesman.

Bayly said Revenue minister Stuart Nash could have dealt with the issue through a supplementary order paper this week.

"The minister put an SOP on the table he could have added another clause that deals with this in the stroke of a pen."

Bayly said it went against all the principles of tax.

"You can't take on one side and not give back on the other."

Bayly said he respected the IRD's decision not to go back to previous years but said the last tax year should be sorted.

"If you are going to require taxpayers to pay money you should balance it on the other side."

A spokeswoman for Nash would not answer the question of why he would not change the law to enable tax overpayers to get their $42 million back for the most recent tax year.

She referred the Herald back to comments made by Nash at the finance and expenditure committee last Wednesday.

Nash told the committee New Zealand's tax system was based on self-assessment and every year portfolio investment entity providers - which includes KiwiSaver providers - send a letter to individuals outlining the tax rate they were on.

"It is actually up to the investor themselves to ensure that information is correct," Nash told the committee."

IRD commissioner Naomi Ferguson told the committee the minister had asked it to look into the current legislation which was established many years ago under a different system.

"Because we used the PIE regime to make that full and final provision ... it is a different regime that operates for normal taxation.

"The way in which the PIE legislation is set is that your PIE rate is full and final unless you have underpaid so we have no ability under legislation to think about those who have overpaid."

The PIE regime was set up in 2006 under the previous Labour-led government.

Nash told the committee the situation had highlighted a wider problem around financial literacy.

"Every single person should have received a letter from their provider outlining the rate they are paying. If we had a higher level of financial literacy they would be able to look at this and self-assess."

He said it highlighted the number of Kiwis who have not understood it or not changed the rate.

The IRD will start contacting people from mid-July to let people know if they are on the wrong rate.