KiwiSaver changes called 'great tax switcheroo'

Photo / The Aucklander

Changes to KiwiSaver this week mean that for many savers who earn more than $58,000, the Government is taking more cash out of previously tax-free employer contributions than it pays out in annual incentives.

What's more, reductions to government contributions apply from July, despite Prime Minister John Key maintaining they would not take effect before the November general election.

Government contributions to KiwiSaver accounts - or member tax credits - were halved in this week's Budget from $1 for each dollar put into the scheme by savers themselves to 50c.

That reduces the maximum government contribution from $1040 a year to $520 or $10 a week and will save almost $2 billion over four years.

The Government also removed the tax exemption for the minimum employer contribution, which, like the employee contribution, was lifted from 2 per cent to 3 per cent.

From April 2012 employer contributions will be taxed at the employee's top tax rate. The removal of the tax exemption will generate $680 million in additional revenue over the four years to 2015.

Finance Minister Bill English yesterday said the tax exemption was axed because it unfairly favoured higher income earners and had to be considered against programmes like Working for Families and interest free student loans.

"I think we made a balanced and reasonable decision and that is smaller cuts to family incomes and get rid of the tax exemption."

He had not considered the possibility of reinstating the exemption when the Government's finances improved.

But information supplied to the Green Party from official sources shows that at annual income levels above $60,000, the amount of tax that will be paid on minimum employer contributions each year - but which would have gone into savers' accounts if the exemption wasn't axed - exceeds annual government contributions.

At $60,000 - excluding administration costs - the Government is collecting $18.57 more than it pays out each year.

At $70,000 the Government will be collecting $108.57 more than it paid out each year, and at $100,000 the difference will be $468.57 a year.

Greens co-leader Russel Norman labelled it "a great tax switcheroo".

"National pretends they're cutting taxes but behind the scenes in a roundabout way you end up paying more."

He said the KiwiSaver changes this week amounted to a triple clawback.

"On one hand the Government gives less, then a lot of people won't realise the employer contribution will come out of their salary, and thirdly they're going to end up paying tax on it anyway - more tax than the Government's giving them with the subsidy."

A spokesman for Mr English said KiwiSaver remained an attractive scheme even with the removal of the tax exemption and other changes. Savers also still received a $1000 kick-start when they joined the scheme.

Meanwhile, in speeches before and after the Budget, Mr Key has said the KiwiSaver changes - which were passed as Parliament sat under urgency yesterday - would not affect people before the November election, giving them the chance to endorse the policy or remove National from government.