Power Play: KiwiSaver tax dropped like a political hot potato

3:02 pm on 31 August 2022

Power Play - Tax is already a major vulnerability for Labour, and it kicked the door open again with its stealth move to levy GST on KiwiSaver fees.

Labour MP David Parker

Revenue Minister David Parker has abandoned plans to tax KiwiSaver fees less than 24 hours after the proposal was introduced. Photo: RNZ / Angus Dreaver

Just as quickly, that door was slammed shut when the law change, introduced quietly to Parliament on Tuesday, blew up in the government's face.

Less than 24 hours after it became public, the proposal was dropped like the hot potato it proved to be.

The principle was to fix a loophole in tax law under which financial services are exempt from the 15 percent goods and services tax (GST).

Inland Revenue's own advice says it would have raked in about $225 million more a year from 2026, "a cost that would likely flow through to retail investors in the form of higher fees". By 2070, the law change could have reduced KiwiSaver fund balances by $103 billion.

When first asked about it at Parliament on Tuesday, Revenue Minister David Parker did not necessarily accept it would hit KiwiSaver investment funds that hard, telling reporters "the market will respond accordingly".

"If fees are already at a very competitive rate, that might flow through [to] fees. If they're not, it may well be that there's no effect on fees."

The politics for the government were horrible: from a party promising no new taxes, during a cost-of-living crisis where people are seeing their wages disappear into the inflation black hole, as retirement savings plummet amid market turmoil.

Labour, of course - under former finance minister Sir Michael Cullen - was also the architect of KiwiSaver, which Parker today said as "its parents", the government "would never to do anything to undermine".

It was manna from heaven for National leader Christopher Luxon, who is strongly pushing tax cuts as his party's tonic while painting Labour as "addicted to spending and [needing] to dream up whole new tax grabs".

The GST change clearly was not flagged up as a political risk when the highly technical omnibus tax bill made its way through the process of being introduced to Parliament, with Parker now admitting they were not expecting the controversy caused, and now backing off to avoid any further damage to confidence in the KiwiSaver scheme.

The fact the change was only brought to light by media reports flagging warnings from industry experts rather than being proactively highlighted by the minister did not help either.

A key plank of National's opposition is on tax: It counters many of Labour's cost-of-living measures with the offer of a broad-based tax cut, along with promises to scrap all new taxes since Labour took office in 2017.

The question facing Labour was whether it would cut its losses on a tax not due to kick in for several years - but causing plenty of pain now - or forge ahead in the belief the electorate shared its commitment to tax law consistency.

Apparently it was a straightforward decision, made in the hour before ministers filed down for the regular media run into the House for question time by Parker and finance minister Grant Robertson.

Parker had earlier flagged a problem with some of the larger fund managers gaining a competitive advantage over smaller players by exploiting the loophole, but in abandoning the GST change, said "if the sector as a whole is happy to operate with the status quo then we will leave them in place".

He's taken aim at some media "misrepresentation" that led people to believe it was a new tax on KiwiSaver contributions, and also at some fund managers he's accusing of saying one thing to the government about wanting a change, then coming out publicly against it - the combination of both causing a "furore".

"We were expecting support from some of the smaller KiwiSaver providers... that hasn't been apparent and so we're not willing to fight that fight." Parker declined to name names.

The reason the government didn't front foot the GST proposal, he said, was they "weren't expecting the backlash".

During the 2017 election campaign, Labour leader Jacinda Ardern made a "captain's call" and kicked the Capital Gains Tax to touch when it became apparent it was starting to cost the party dearly.

The swiftness of this backdown demonstrates once again how forcefully public sentiment can change the minds of the government, who could - along with everyone else - see this was going to end badly.

Get the RNZ app

for ad-free news and current affairs