How does tax impact my KiwiSaver plan?

If you’d like to know how different KiwiSaver components are taxed and the long-term impact of tax on retirement savings – this guide is for you.

As the saying goes, there are only two certainties in life, and one of them is taxes. Tax is everywhere, including components of your KiwiSaver account, so it pays to have some understanding of it.

In this guide, we’ll look at:

1. How KiwiSaver earnings are taxed – and what is not, like capital gains on Australian and NZ shares.

2. How to set your KiwiSaver tax rate – what is the PIR rate, how to calculate it, and why you need to review it over time.

3. How tax impacts your inflows and outflows – including your contributions through to your investment earnings, but not your KiwiSaver withdrawals.

1. How are KiwiSaver earnings taxed?

It’s a key question and the answer depends on the nature and source of the earnings. To be exact:

Capital gains on Australian and NZ shares: These are generally tax-free, as no tax is charged on the gains made from investing in New Zealand shares and most Australian shares⁽¹⁾.
Dividends and interest: Income generated from KiwiSaver funds is taxed at the Prescribed Investor Rate (PIR), which varies depending on the investor’s annual income (we’ll return to this shortly).
International shares: When it comes to international shares, you generally pay tax on the lower of the gain or loss from your investment and 5% of the value of your investments. This does not mean that you pay 5% though: if you are on a 28% PIR, then the maximum tax you will pay is 1.4% of the value of your investments. Having said that, if the value of the shares grows by less than 5%, you will pay tax on that amount or maybe even get a tax refund, if the value of the shares reduces.

2. How to set your KiwiSaver tax rate (PIR)

As we said, you pay tax on the interest and dividends that your KiwiSaver plan generates, at a certain PIR rate.

This could be 10.5%, 17.5%, or 28%, based on how much income you earned in either of the past two years. To determine your PIR, you need to consider both your taxable income and your total income, which includes income from PIE investments like KiwiSaver. Most KiwiSaver funds are Portfolio Investment Entities (PIE).

In short:

Your PIR is 10.5% if, in either of the past two years, your taxable income was $14,000 or less, AND your total income (PIE and non-PIE) was $48,000 or less.
Your PIR is 17.5% if your taxable income was $48,000 or less, AND your total income (PIE and non-PIE) was $70,000 or less.
Your PIR is 28% if your taxable income was $48,000 or more, OR your total income (PIE and non-PIE) was $70,000 or more.

When you sign up to KiwiSaver, you’re asked to give your PIR to your KiwiSaver provider. If you don’t, they will apply the default PIR of 28%, which may be higher than your actual PIR.

As a KiwiSaver provider, we get notified by IRD if they think one of our clients is on the wrong PIR, but it’s always better to stay on top of things, to avoid overpaying. That’s also why we recommend you review your PIR rate each tax year and let us know of any changes.

Other than that, you don’t need to do much: your KiwiSaver provider – like us – will pay tax on your behalf, applying the PIR they have on your profile.

3. How tax impacts your inflows and outflows

The income generated by your KiwiSaver investment is not the only thing that’s taxed. Tax can also impact how much money ends up in your KiwiSaver account.

Your KiwiSaver contributions are calculated on your before-tax pay. However, you still pay tax on the full amount that you earn, so there are no tax savings from investing in KiwiSaver (we are a global outlier in this regard).

Here’s what’s taxed and how:

KiwiSaver contributions deducted from your salary and wages – If you’re an employee, KiwiSaver contributions are deducted automatically from your pay and calculated on your before-tax salary/wages. So, you end up actually contributing more than 3% of your take-home pay once tax is applied. Suppose you earn $1,000/week before-tax and your KiwiSaver contribution rate is 8%. This means that $80 of the total $1,000 pre-tax income will go directly into your KiwiSaver account. But you’ll be paying income tax on the full $1,000, not $920 ($1,000-$80).
Your employer contributions – Employer contributions are subject to the Employer Superannuation Contribution Tax (ESCT). The ESCT rate depends on how much you earn and how long you’ve worked in the job(2). This is why employer contributions are always lower than employee contributions despite both being a 3% contribution.
Your KiwiSaver investment earnings – as above.

Here’s what’s not taxed:

Your KiwiSaver balance – Your KiwiSaver balance is not taxed, as we’ve seen you only pay tax on a portion of your KiwiSaver returns.
KiwiSaver withdrawals – No matter why you’re withdrawing (retirement, first-home deposit or significant financial hardship), withdrawals from your KiwiSaver account are always tax-free. And if you think about it, it makes sense as you would have already paid tax on other components along the way.

Do you have any questions for us?

For any queries about KiwiSaver taxation, make sure you contact your accountant or a tax expert. Hopefully, after this guide, you won’t have to.

And if you’d like to discuss how to make the most of your KiwiSaver plan – we’re here to help. Use our digital advice tool to check if you’re on track or call the team at kōura on 0800 527 547.

References

(1) IRD.govt.nz – Foreign investment fund rules exemptions

(2) IRD.govt.nz – Employer superannuation contribution tax (ESCT)

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.

How does tax impact my KiwiSaver plan?