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Tax on Your KiwiSaver

One of the great things about Kiwisaver is that it can be drawn tax free when you reach retirement which is a very valuable benefit. It's unusual because normally, in New Zealand, tax is mostly worse than in other countries e.g. the complete lack of any personal allowance here whereby you can earn an amount tax-free, unlike Australia and the UK.

However, Kiwisaver is not all tax-free. The contribution that your employer makes is taxable via an unpleasant little tax called ESCT for short, or Employer Superannuation Contribution Tax in full, at a rate of tax which depends on your overall income ranging from 10.5% to 33%. Talk about a stupid idea - don't they want to encourage people to save for their retirement to reduce the numbers of people dependent on the government taxpayers for support?

The second way that Kiwisaver is taxable is called your PIR or Prescribed Investor Rate, the actual rate of which again varies on your income plus your circumstances. Tax is payable on the income arising, not the underlying capital in the scheme from where ever that originated and not already taxed income from prior years.

In typical IRD fashion, it's not easy for the non-accountant to work out what your PIR percentage should be, and needless to say, the IRD have made sure (so they don't get the blame) that it is wholly your responsibility to work out the correct percentage. Some of the banks have a flow chart which helps, see here.

It didn't surprise me in the least when the IRD announced in June of this year that 450,000 people have been paying the wrong rate of tax on their Kiwisaver and other investments, read hereSome people are going to receive bills and others, in theory, are going to receive refunds. It is entirely the IRD's fault for making things complicated and very few people understand how it all works, especially as to whether you have a responsibility to report yourself to the IRD if you have applied the wrong PIR.  

If you want to make sure you're not overpaying tax get in touch, tax is complicated.