KiwiSaver: Scheme can't be used in tax return

Providers generally contact members each year to check tax rates. Photo / Getty Images

KiwiSaver investment income is effectively quarantined from other gains or losses and the tax paid is final.

Question: I have tax credits with IRD due to a small partnership which runs at a loss (at present).

I do not have an income to offset the losses against, so tax credits build up at IRD awaiting me earning any money!

I earn a little interest with the bank, so claim back tax paid on that in my annual return.

My question is: Why can't I claim back the tax I pay on my KiwiSaver investment?

When I rang IRD they told me there is no legislation to enable me to offset my tax credits (with them) against my tax I have to pay (to them) from any earnings my KiwiSaver may make.

"The hardest thing to understand in the world is the income tax," Albert Einstein is reputed to have said.

Darshana Elwela, accounting firm KPMG's national tax director, may not be able to tackle the theory of relativity, but he has taken a look at your vexing tax question.

This is his response: "Good question. Assuming your KiwiSaver fund is a PIE (portfolio investment entity), your KiwiSaver investment income is effectively quarantined from your other income or any losses.

"This is because tax paid on your KiwiSaver investment, unlike tax on interest from your bank account, is a 'final' tax, if you've elected the correct tax rate with your fund.

"This was deliberate to stop people that otherwise don't need to file a tax return having to do so because they have a KiwiSaver account.

"But one of the downsides is that KiwiSaver income cannot be included in your tax return to offset your tax losses.

"While your partnership losses can be taken into account in determining your KiwiSaver tax rate (or "prescribed investor rate"), someone with losses overall will still have a minimum 10.5 per cent tax rate on their KiwiSaver investment," says Elwela.

Investment earnings on KiwiSaver are taxed, with your provider making the deduction and passing it on to the IRD.

A KiwiSaver scheme falls into two categories for taxation: a widely-held superannuation fund or the portfolio investment entity (PIE) Elwela talks about above.

Check the investment statement from your provider -- these should be available on its website -- if you are unsure whether you are in a PIE or widely-held superannuation fund.

If you are in a widely-held superannuation fund your investment earnings will be taxed at 28 per cent.

Those people in portfolio investment entities (PIEs), which includes everyone in one of the default schemes, will be taxed at a rate called your "prescribed investment rate", or PIR.

KiwiSaver providers will generally contact you each year to make sure you're being taxed at the correct rate.

A PIR of 10.5 per cent, 17.5 per cent or 28 per cent will be based on your income, plus any investment earnings, from the previous two income years.

The IRD website can help you work out your PIR: ird.govt.nz.

Disclaimer: Information provided is stated accurately to the best of the respondent's knowledge at the time of publication. It is general in nature and should not be construed, or relied on, as a recommendation to invest in a particular financial product or class of financial product. Readers should seek independent financial advice specific to their situation before making an investment decision.

To have your KiwiSaver questions answered by the NZ Herald's panel of industry players email Helen Twose, here. Sorry, but Helen cannot answer all questions, correspond directly with readers, or give financial advice.