KiwiSaver and property taxation

Stuff reports:

KiwiSavers are being “harshly” taxed compared to property investors, the authors of a book designed to fire up Kiwis over tax fairness claim.

Deborah Russell, senior tax lecturer at Massey University, and tax consultant Terry Baucher release Tax and Fairness this week, published by BWB Texts.

They claim the more than 2.7 million people in KiwiSaver are being clobbered by tax laws, while the roughly 130,000 landlords who own residential investment properties are much more lightly taxed.

“Inland Revenue estimated the gross residential rental income reported for the year to 31 March 2015 to be $2,008 million. After deducting the $701m of rental losses claimed, the net rental income returned and taxed was $1,307 million.

“Assuming a 33 per cent rate for individuals and trusts, and 28 per cent for companies, this implies a tax take of about $425m, or roughly $33m less than that relating to KiwiSaver funds and superannuation schemes.”

And yet, at the end of March there was just under $39 billion in KiwiSaver, while there were $66.5b of mortgages on residential properties owned by property investors, on properties that were increasing in value rapidly.

I haven’t read the book yet but this extract seems rather to be missing the point. More tax is paid on KiwiSaver income because KiwiSaver produces much more income – despite a lower asset base. Rental returns from property have always been modest at best.

But Russell and Baucher believe most people in KiwiSaver don’t understand how harshly their savings are being taxed as a result of the little-known Foreign Investment Fund (FIF) rules.

They want to dispel that ignorance, and hope their book will get the public interested in tax fairness.

“As both the number of KiwiSaver members and the value of KiwiSaver funds grow, the current tax treatment appears increasingly harsh,” they say.

“If membership is made compulsory, as has been suggested, then under present policy settings a very large and growing number of savers will be overtaxed relative to other assets.”

They quote then opposition MP Lockwood Smith addressing Parliament in 2006, when he opposed the introduction of the FIF rules.

“This legislation will provide an even greater incentive for New Zealanders to bring back their money from overseas and invest in residential property here in New Zealand,” Smith said. “People get the capital gains tax-free and the returns are far better, so why would they not? This is bad legislation because of all those complexities and distortions.”

I don’t know how the FIF regime works but if the authors are saying that the last Labour Government made a blunder by introducing it, well they could well be right. Are they suggesting it be repealed?

Russell and Baucher hope to fire up KiwiSavers to demand the tax system be made fairer, but also to spark a national debate about whether it is finally time for the wealthy to pay tax on their capital gains.

Well of course they should. I support a comprehensive capital gains tax on all productive assets, including the family home, in return for reducing income and company tax to compensate.

I note though that Labour (whom Russell is standing for) have abandoned their policy of having a Capital Gains Tax.

When the public rebels against unfair taxation, governments can change.

Russell and Baucher cite the example of Britain’s Margaret Thatcher, whose 11-year rule came to an end following civil unrest over her plan for a “poll tax” to replace property rates.

Well Labour campaigned on a CGT in 2014 and got 25%. They have dropped the policy in 2017 which suggests they don’t think it is popular.

It is a pity. While Labour’s 2014 CGT was flawed (far too many exemptions, and no compensating reduction in other taxes) it was a step in the right direction.