New Zealand: The Fair Tax for Savers campaign - are savers over-taxed (and if so, why)?

Brief Counsel

The Fair Tax for Savers campaign launched earlier this week is based on the proposition that income from at least two forms of savings is currently over-taxed. We examine this claim and the proposed solutions and conclude that the campaign:

  • has a valid point regarding interest income, which deserves further consideration, and
  • is really seeking a tax concession on KiwiSaver income, rather than addressing an over-taxation concern. Its proposal should be debated on that basis.

First proposal – lower KiwiSaver tax rates

The campaign's first proposal is that rates of tax on KiwiSaver income should be reduced so that the effective rate of tax paid is the same as the marginal rate on other income. It is not at all clear from the campaign material what this means, or how it would be achieved. In reality, rather than addressing over-taxation, this is a push for a tax subsidy for KiwiSaver. In the interests of a high-quality debate, it should be framed that way.

The campaign is obviously correct to say that income from KiwiSaver contributions is currently taxed as it is earned by a KiwiSaver fund. There is no tax imposed when that income is later distributed to the contributor – usually on their retirement.

If that income was taxed only when it was paid out, then the amount available to the contributor on retirement would, at least in some cases, be much higher. The KiwiSaver fund would keep the gross (pre-tax) income and reinvest it for the benefit of the contributor. The deferral of the tax obligation, over what is often a long period of time, means that the Government's effective tax take is much lower, and the contributor's after-tax income commensurately higher.

The campaign claims that this difference in tax outcomes means that under the current tax system, KiwiSaver contributors are being over-taxed, and Kiwsaver Fund tax rates should accordingly be reduced. Of course, KiwiSaver rates are already, for many if not most contributors, one tax bracket lower than their marginal rate.

Chapman Tripp comments

The over-taxation claim does not stand up to scrutiny. Furthermore, any attempt to deal with the suggested inequity would create many more inequities than it might be claimed to solve.

In the first place, the campaign has wrongly framed the issue. The "correct" outcome is not taxation of KiwiSaver income only on withdrawal by the contributor. That involves a significant deferral of tax for no good reason. It is equivalent to arguing that corporate income should not be taxed until it is distributed as dividends to shareholders.

There is no reason in tax policy terms why KiwiSaver investors (or more accurately the KiwiSaver fund they invest in) should not pay tax on income earned from their investment as it is earned, just as other investors in the same assets outside a KiwiSaver fund do.

While it is true that some other types of investment enjoy a tax deferral – in forestry, for example, where the biological income produced by the growth of a forest is not taxed until the trees are sold - this anomaly should not be extended to Kiwisaver, where issues of quantification and liquidity do not arise.

Second, it is not clear how a rate reduction would help KiwiSaver funds that invest in New Zealand shares. The income earned by those funds is either totally tax exempt (capital gains) or in most cases already tax paid before it reaches the fund (fully imputed dividends). If the fund were to receive a refund of imputation credits so that the corporate tax rate was adjusted down to some concessional fund rate (as is done in Australia), that would be a significant tax benefit that direct investors in New Zealand shares would not receive.

Third, it is not possible to solve the "issue" properly by simply reducing KiwiSaver tax rates, since the "cost" of imposing tax on income as earned rather than when withdrawn depends on how long a person is in the scheme for. The only accurate way to achieve the campaign's objective is to eliminate current tax on KiwiSaver income, and impose tax only on withdrawal. This would provide such a significant tax benefit to investment through KiwiSaver that New Zealand, like other jurisdictions, would presumably have to introduce "reasonable benefit" rules to restrict the amount that could be invested each year into KiwiSaver. It would also create pressure for some kind of deferral or reduction of the very large tax cost that would arise on withdrawal. And of course the reduction in tax would need to be funded by changes elsewhere in the system.

Second proposal – inflation adjusting interest for income tax purposes

The second proposal does address a true case of over-taxation. It is based on the proposition that debt investors (such as people holding bank deposits, corporate debentures, government stock) are taxed much more heavily than other investors. That is because a large part of their nominal return is simply to compensate them for the erosion of the value of their investment by inflation. However, this inflation-compensation component is still subject to tax.

For example, if inflation is 2% per annum, and a person deposits $100,000 for a year at a 2% interest rate, before tax that person is no better off, in real terms, at the end of the year than at the beginning. However, the income tax system taxes nominal gains not real ones. Assuming a tax rate of 33%, the person will pay income tax of $660, and after tax is worse off in real terms at the end of the year. If the interest rate is instead 4%, the person will pay tax of $1,320 and be left with $102,680 after tax. They are better off, in real terms, by only 0.67%.

The campaign proposes that there would be no tax on the income from the 2% deposit, and only $660 tax on the income from the 4% deposit.

Chapman Tripp comments

This problem is obviously much more serious at higher than current rates of inflation. It is less of a problem for banks and other financial intermediaries than it is for private investors. The former's interest income is largely offset by interest expense, for which they get a correlative benefit from the current tax system.

The campaign proposes not taxing investors on this inflation component. Obviously this would also require denying borrowers a deduction for that component. There are tax systems in other countries, notably Scandinavian ones, which make an adjustment of this sort.

Legislating a workable rule along these lines would present some challenges. For example, it would need to take into account the effect of derivative positions which hedge debt assets or liabilities. The treatment of fixed rate equity would also need to be considered. There would also be pressure for a similar indexation of long term revenue account assets, and even of depreciable assets for depreciation purposes.

Nevertheless, as the population ages, and if financial investment becomes more of a widespread feature of individual savings, we believe this idea deserves debate and serious consideration by the Government and policy-makers.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions