Tax special - get your rates realigned

As the New Zealand Herald noted in a story this week, tax changes introduced last year, but scheduled to take effect this April, could disadvantage KiwiSaver investors unless they advise their providers of their correct tax rate.

And while it is important for KiwiSaver members to check the right prescribed investor rate (PIR) is applied to their accounts after April 1 - providers should be helping out here by reminding investors of the changes - the new rules cover all portfolio investment entities (or PIEs, of which KiwiSaver funds are a subset) and bank accounts.

The IRD has issued a useful note explaining how the new tax rates work.

However, many people may not be aware of the bank account withholding tax realignment, which will probably result in most seeing a hike in the impost as the current default rate of 19.5 per cent rises to 21 per cent after March 31 (the same is true for KiwiSaver and other PIEs).

I haven't seen the maths on this but you'd have to think the government comes out on top in this deal. Lower income-earners (ie those earning $14,000 or below in a tax year) can claim a lower PIR of 12.5 per cent but banks (and PIE sellers) must be notified by account holders.

Given the general inertia of consumers when it comes to banks, it's likely that many potential 12.5 per cent taxpayers - kids and non-working spouses, for example - will end up paying almost twice as much in tax on their savings as they have to.

While overall the PIR changes may result in bank/PIE investors paying more tax on earnings, they also create some tax-minimisation opportunities, as I covered in a previous blog.

Either way, the PIR changes will affect just about everybody, and if you don't pay attention to them, your odds of losing out lift considerably.


David Chaplin