450,000 people have been paying wrong rate of tax on KiwiSaver and other investments, IRD discovers

Tuesday, 4 June 2019

Vast numbers of people have paid tax incorrectly on what may be their largest taxable asset, according to IRD's shock find.

Inland Revenue says 450,000 people have been paying the wrong rate of tax on their KiwiSaver accounts and other managed funds.

There will be tax bills coming for many, with some running into at least the hundreds of dollars.

Inland Revenue spokeswoman Gay Cavill said an overhaul of the tax system in April meant Inland Revenue was now better able to see what rate of tax people should be paying on their KiwiSaver accounts and other investment savings.

'We will be proactively contacting about 450,000 people over the next few weeks who appear to have not been paying the correct PIR (prescribed investor rate) on managed funds such as KiwiSaver,' she said.

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Inland Revenue has yet to confirm whether any or many of the people it is contacting may have been overpaying tax, but a KiwiSaver expert says that in any case, there can be no refunds.

Just over 120,000 letters have gone out so far.

'Inland Revenue's new system is better able to see what rate people should be on and we have sent letters to those people advising them what the correct rate should be,' Cavill said.

'Consequently, some of these people may have had to pay a higher amount of tax this year than they were expecting.'

Cavill said some of the people Inland Revenue was contacting might instead be due refunds 'but Inland Revenue can't break it down at this stage nor can we provide an average bill amount'.

A public relations professional said she was among the people who had received a letter from Inland Revenue and was shocked to be facing a bill of $600.

'KiwiSavers unbeknownst to us have been paying a lower PIR tax rate than we should – though no one told us – and as a result have been pinged with a tax bill,' she said.

'No one seems accountable.'

She had been paying 10.5 per cent tax on her KiwiSaver account when she should have been paying the top rate of 28 per cent, she found out.

'I would have thought the provider should have some system to ensure I had selected the right rate, but 'no'.'

As a general rule, people with a taxable income above $48,000 should pay tax on portfolio investment entities (PIEs) such as KiwiSaver at the rate of 28 per cent, while people with an income of between $14,000 and $48,000 will generally pay the 17.5 per cent rate.

Only those with an annual income below $14,000 should pay the 10.5 per cent rate.

But Cavill said Inland Revenue was reliant on people telling their investment fund manager what their correct PIR was.

'The new system means we can now more easily identify the correct PIR for each customer and advise them early to ensure they pay the right amount of tax as part of their income tax assessments,' she said.

Martin Hawes, financial advisor and chair of the Summer Investment Committee, believed a significant proportion of the wrong tax rates would be caused by people in 'default' KiwiSaver schemes paying too much tax, but said in the case of overpaying PIR there were no refunds.

That seemed unfair, especially given that most people who overpaid PIR tax would be on low incomes, he said.

'We need a legislative change to require an employee to provide a PIR as part of the information they are required to give their employers. Then, an employer would be required to pass that onto IRD as part of the default KiwiSaver application process,' he said.

Cavill said refunds could apply if people had other income, however. 'The income received from a PIE is considered as part of a customer's overall income and could change a customer's final tax position,' she said.