What next for axed KiwiSaver policy?

Revenue Minister David Parker has not decided what to do about New Zealand's GST problem. Photo / Pool

The Government has officially withdrawn the bill which would have raised tax on KiwiSaver fees, docking people's retirement funds by thousands of dollars by the time they retire.

The policy was intended to fix an inconsistency in the application of current GST rules, but the Government's fix would have had the effect of pummelling KiwiSaver balances by $103 billion by 2070.

Revenue Minister David Parker said no decision had yet been made on whether the Government would seek to fix the KiwiSaver GST issue in some other way.

Papers published with the original change warned that some fix was needed because the current practice of fund managers was "inconsistent with current GST legislation".

The same paper also warned that even doing nothing would result in additional tax take of $135 million a year, because of IRD's enforcement regime. Also on the table is legislating the current patchwork regime, which would cost nothing, or taking the GST off all fees, costing $22m.

Parker said the Government had "not reconsidered" what to do about the GST question, and was focused on resubmitting the existing bill without the controversial GST changes.

The tweak was meant to streamline the way KiwiSaver and managed funds were taxed. Some funds paid no GST, others paid an effective rate of 1.5 per cent, and others paid the full rate of 15 per cent.

The tax would have subjected all Kiwisaver funds to the full GST rate of 15 per cent charged on their fees and left Kiwisaver funds collectively $103 billion poorer by 2070, when people beginning work today would retire - according to modelling from the financial markets authority. The total hit to savings, including KiwiSaver and non-KiwiSaver was $186b.

GST fees are charged as a percentage on fund balances, the tax would have taken a 15 per cent of that fee.

The tweak was included in an omnibus tax bill that included things like removing fringe benefit tax on public transport, and ensuring services like Airbnb and Uber pay the correct amount of GST.

The Government backed down on its proposal to add GST to KiwiSaver fees on Wednesday. Responding to questions on the business statement ahead of Question Time on Thursday, Leader of the House Chris Hipkins said the whole bill had been withdrawn.

It will be reintroduced in the future minus the KiwiSaver GST changes that were axed on Wednesday.

Parliament will be in recess next week. Hipkins said the tax bill, which must be introduced and pass to set tax rates for the next year, would be reintroduced "shortly".

"It is absolutely the Government's intention to introduce a taxation annual rates bill and that will be done very shortly," Hipkins said.

It is not yet clear how the bill would deal with the overarching GST problem.

In the regulatory impact statement published with the bill warned that while there was "limited evidence" of funds structuring themselves to compete with other funds using tax advantages, there was a problem that different funds were treated inconsistently.

The statement said the Government considered four options for fixing the problem - including the option it floated and killed earlier this week.

The first option was to pass a law allowing the current rules to continue.

The regulatory impact statement said legislating for the current rules to continue was better than simply doing nothing because "most of the current industry practices are not consistent with current GST legislation, which is unclear and largely depends on the type of service being supplied".

While officials preferred the option that Parker introduced and killed earlier this week, they did say that the "main advantage" for legislating for the current rules to continue would be that "it will not impact on fees charged to investors of managed funds, including KiwiSaver members".

However this option had the risk of "entrench[ing] the complexity" of the current rules and introduces "new integrity risks such as 'cherry-picking'."

This would work by a fund manager choosing a GST treatment to maximise GST deductions when they are in a start-up phase and to later switch to an exempt treatment to minimise the GST they charge once they are larger and produce a large amount of fee revenue.

Another option is simply to make all fees GST exempt. IRD said this would cost the Government about $22m in lost GST in 2026, the first year of operation, rising by 10 per cent a year.

The final option is to do nothing and allow IRD to enforce the current rules based along the tax agency's interpretation of the current rules.

This will result in "manager fees becoming exempt and investment manager fees becoming subject to 15 per cent GST".

This would also see an increase in revenue, this time of $135m a year, growing by 10 per cent a year from 2026 when it is implemented.

The increase in revenue is because IRD's interpretation of the current rules would mean investment manager fees becoming subject to 15 per cent GST.

Fees for "investment manager fees are higher than the fund manager fees", according to the regulatory impact assessment, leading to the increased revenue.

Parker and Finance Minister Grant Robertson clashed with National's finance spokeswoman Nicola Willis on Thursday.

Willis asked Robertson to rule out taxes on residential property.

Robertson, answering on behalf of Prime Minister Jacinda Ardern said the Prime Minister had been "very clear that there is no new taxes being created by this Government beyond that on which we campaigned".