Treasury warned revenue Minister David Parker that putting GST on some Kiwisaver funds would reduce the level of savers’ accumulated savings in them..
As the public realised this today, the Beehive reacted quickly and abandoned the proposal.
But that has left a number of questions.
Treasury says the current way that some Kiwisaver funds GST does not comply with the law.
And ironically, the big winners out of the whole affair are the big Kiwisaver funds, many of which are owned by the Australian-owned banks.
The losers are the smaller New Zealand-owned boutique funds.
The decision to reverse the proposal less than 24 hours after it surfaced seems to have been a product of real — and possibly justifiable — political fear.
Those close to the decision will argue that the Financial Services Council, representing the big Kiwisaver funds, many owned by the “Big Four” banks, was ready to go with a scare campaign to oppose the proposal.
A worst-case scenario could have seen Kiwisaver investors so frightened that they either ceased contributions or resigned from their fund.
But it is glaringly apparent that the much-vaunted Beehive communications system was not prepared.
The press release on Tuesday to announce the legislation containing the tax change, the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill, was headlined “Tax bill removes FBT on public transport” and made no mention of the GST move.
Regardless of the press release, the story broke on Stuff the same afternoon.
By yesterday the morning radio and TV shows were full of it.
Housing Minister Megan Woods defended the decision on NewstalkZB but on TVNZ Breakfast, the Financial Services Council CEO, Richard Klipin, said the move would mean “a lot of people are going to be getting taxed a lot.”
National MP Paul Goldsmith posted on social media: “Labour is coming after your hard-earned retirement savings with another new tax.”
Although that was not strictly correct, it was an indication of how the issue was going to play out in public.
What is so odd about the Government’s management of the proposal is that its major beneficiaries, the Australian-owned banks, in the year to September 30, 2021, made a combined profit of $6.1 billion, according to KPMG’s annual financial institutions’ survey.
A Labour Government could have easily mounted a campaign against the banks and say the move was designed to level the playing field for smaller New Zealand-owned institutions.
Which is precisely what the intention was.
That, however, never got a look in as what appears to have been political fear gripped the Beehive yesterday morning.
If the key Ministers involved, Finance Minister Robertson, Parker and the Prime Minister, were looking for a measure of the mood outside the Beehive; it was available on Twitter where Neale Jones, the former Chief of Staff to Labour Leader Andrew Little, tweeted, “The GST on KiwiSaver fees issue feels like an unforced error. There may well be legitimate tax principles behind it, but no one will hear that or understand it. An absolute gift for the opposition.”
By 1.15 p.m. — 23 hours and 21 minutes after the original announcement — another press statement appeared, cancelling the proposal but also presenting the Government’s justification for it.
“The Government will not proceed with a proposal to standardise the application of GST to fees and services of managed fund providers,” it said.
“Inland Revenue and Treasury advised this change be made to remove a loophole used by large financial companies, so they would have to align with how others in New Zealand pay GST.”
Simply, the issue revolves around what constitutes a financial transaction, which Inland Revenue defines as engaging in a financial service.
Under GST law in New Zealand, all financial services are GST-free.
The term “financial services” covers a wide range of transactions, including the provision of loans, the taking of deposits, and trading in financial securities such as shares and debentures.
But what complicates the fees that Kiwisaver investors are charged is that some of the fee is for things other than a financial transaction, such as research and providing advice.
So, some Kiwisaver funds apply 15% GST to all of their services (as, in their view, their services are providing “advice” or other types of services that are subject to 15% GST).
These tend to be the smaller or so-called “boutique” funds that do most of the investing themselves (and, therefore, their own research and advice).
Others, the big funds, many owned by the Big Four banks, invest their Kiwisaver cash in big investment funds which do all the research and advice work.
Therefore they treat only ten per cent of their services as being subject to 15% GST and the remaining ninety per cent as exempt from GST (because they consider their services are mostly “arranging” the buying and selling of investment products and so should qualify for the GST exemption for financial services).
This may allow them to charge lower fees to the wholesale funds (as they effectively only charge 1.5% GST on their management fees).
Fees are important to Kiwisaver investors.
“Fees can have a large impact on the financial wellbeing of investors as they directly contribute to the level of accumulated savings, including retirement savings for retirement schemes such as KiwiSaver,” Treasury said in its Regulatory Impact Statement on the proposal.
And though Revenue Minister David Parker complained that newspaper coverage claiming this was a tax on KiwiSaver “gave people the impression their KiwiSaver would be subject to GST which is not the case”, to some ways of looking at it, it was the case as the Regulatory Impact Statement suggests.
“The clarion call against it risks undermining public confidence in KiwiSaver,” Parker continued, giving a hint as to why the Beehive had reacted so quickly.
But as Revenue Minister, he had been warned.
In the regulatory Impact Statement, Treasury said any change could have a big impact.
“Requiring fund managers and investment managers to implement a new GST treatment could have a large impact on the fees charged to funds and retail investors (such as KiwiSaver members) as well as impose transition and compliance costs,” it said.
And IRD Officials’ issues paper in February 2020 favoured taking action on the inconsistent application of GST to Kiwisaver Funds.
“Because different types of manager and investment manager services can have complex and differing GST treatments, the current GST rules can distort competition by favouring certain types of managed funds, “it said.
“The current GST rules can also add costs to managed funds products.”
Treasury more or less adopted those recommendations in its Regulatory Impact Statement but was not totally convinced.
“The inconsistent GST practices may have allowed some fund managers to structure themselves in order to develop a competitive advantage over others, though there is limited evidence of this,’ it said.
Treasury said four options to address the issues were considered. The two main ones would have either introduced legislation to allow the present situation to continue or an alternative, which was the one adopted, would simply impose the 15 per cent GST on all fees to all funds.
“The Financial Services Council, which represents the largest managed funds, has expressed a preference for legislating to effectively allow the current GST practices to be able to continue,” the statement said.
“It is necessary to legislate to achieve this outcome 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.”
And another warning: “ The main advantage of this option, over the other options, is it will not impact on fees charged to investors of managed funds, including KiwiSaver members.”
The other option, the 15 per cent GST across-the-board proposal, was preferred by the boutique funds.
“This is because it provides a level playing field with other funds and reduces some compliance costs,” the statement said.
“This is the least preferred option for the larger fund managers.”
Treasury calculated that it would deliver $225 million in annual revenue from April 1, 2026, onwards, increasing by ten per cent each year.
As far as Kiwisavers would have been concerned, that was money coming out of their weekly contributions and not going to their retirement funds.