Huge numbers who underpaid tax on KiwiSaver last year 'off the hook' for previous years

Wednesday, 5 June 2019

Despite discovering 450,000 people paid the wrong rate of tax on KiwiSaver and other PIE investments last year, the department says it won't purse those people for earlier 'errors'.

Inland Revenue has made a huge call not to go back through the tax affairs of hundreds of thousands of people who it discovered had paid the wrong tax rate on their KiwiSaver investments last year to see if they had also underpaid tax in previous years.

The department would not on comment on whether that meant it was turning a blind eye to hundreds of millions of dollars or potentially billions of dollars of tax avoidance by KiwiSavers and other investors some of which may have been intentional.

The tax department dropped a bombshell on Tuesday when it said it had discovered thanks to an April computer upgrade that 450,000 taxpayers had self-selected the wrong tax rate on their PIE (portfolio investment entity) investments, such as KiwiSaver and managed funds.

The department has so far written to 120,000 of those taxpayers, some of whom reported being asked for hundreds of dollars more tax for the 2018-19 financial year as a result.

* Inland Revenue contact centres experience significant overloading**

Some of the taxpayers who contacted Stuff said they had no idea their KiwiSaver providers had them down as having to pay tax on their investment income at the lower PIR (prescribed investor tax rate) of 10.5 or 17.5 per cent, when they should have been on the top rate of 28 per cent.

People might accidentally be on too a low a PIR if they were on low pay when they set up their KiwiSaver account and then moved into a higher income tax band and either forgot or didn't know they had to advise their provider of that change in their circumstances.

However, it is also possible that some people might have knowingly declared too low a PIR to their provider.

Revenue Minister Stuart Nash has indicated Inland Revenue's choice not to look more deeply into the past affairs of people who selected too low a tax rate on their KiwiSaver investments last year was a decision for the department.

Inland Revenue spokesman Rowan McArthur said up to now people had been responsible for giving their investment provider the correct PIR that they should be paying on their investments.

But he said the department did not plan to go back through its records to see if those people who had self-selected too low a PIR on their investments in the 2018-19 tax year had also done so in previous years.

'There is no intention to go back over previous years. But from now, our system can help ensure each person has indicated the right PIR,' he said.

'A business decision was made that Inland Revenue's resource should be devoted to moving forward from this tax year, confident in the improved information and processes the new system gives us, rather than attempt to track down every possible instance of error by people in past years.'

The implication of not delving into past returns is that people likely to have underpaid tax before 2018 by declaring a wrong PIR will not be pursued for unpaid tax, while people who honestly declared themselves as being on the higher PIR rates will have paid that tax in full.

McArthur said Inland Revenue would not speculate on what if any proportion of the under-taxation might have been intentional.

Revenue Minister Stuart Nash declined to comment. 'Compliance and enforcement decisions regarding individual taxpayers are operational decisions for Inland Revenue,' a spokeswoman for the minister said.

There is some sanction on people who selected too low a PIR rate in 2018-19 – beyond having to now pay the tax they should have done for that year.

Inland Revenue's rules mean they will need to pay tax on that undertaxed income at their marginal tax rate of 33 per cent, rather than the discounted maximum PIR rate of 28 per cent that could otherwise have applied.

McArthur confirmed that anyone who had self-selected too high rate of tax on their PIE investments would not be entitled to refunds on the tax overpayments that would have resulted from that.

That is despite the fact that in order to overpay tax on investments such as KiwiSaver, people would need to be on relatively low incomes, under $48,000.

PIE tax is charged on some of the investment returns of KiwiSaver accounts and managed funds.

Rather than coming out of people's pay packets, the tax effectively reduces the gains they make on those investments.

But people who paid too little PIE tax investments such as KiwiSaver last year would need to pay the underpaid tax directly to Inland Revenue, rather than seeing that come out of their investment returns.