A deep dive into how KiwiSaver is taxedA deep dive into how KiwiSaver is taxed

KiwiSaver is often referred to as a Taxed-Taxed-Exempt (TTE) model, where:

• contributions are taxed

• investment earnings are taxed

• withdrawals and the eventual retirement payout are not taxed.

In New Zealand, our TTE structure is relatively unusual in comparison to other countries, where  most use an Exempt-Exempt-Taxed (EET) system where:

• contributions are untaxed

• returns are untaxed

• the eventual retirement payout is taxed.

1. Your employee contributions—taxed before they go in

Employee contributions are calculated as a percentage of gross (pre-tax) pay, but come out of your salary after PAYE income tax has already been deducted. In other words, you're contributing from after-tax dollars.

2. Employer contributions—subject to ESCT

Employer contributions are not tax-free. Employer Superannuation Contribution Tax (ESCT) is the tax withheld from the contributions employers make to employees' superannuation accounts, including KiwiSaver.

3. Investment earnings—the PIE/PIR tax system

This is where KiwiSaver's tax treatment gets genuinely distinctive and advantageous for many people. KiwiSaver returns are taxed at a capped rate of 28%, even if your marginal income tax rate is higher (e.g. 33% or 39%).

4. Withdrawals—tax free

Here's the good news: as explained above, here in New Zealand KiwiSaver withdrawals are not taxed like they are in many other countries globally. Since contributions were made from after-tax income and fund returns are taxed annually inside the fund via the PIE regime, there is no additional tax when you withdraw at 65 or for a first home purchase. 

Sharesies’ KiwiSaver funds are Portfolio Investment Entities (PIEs).

Your investment returns are taxed at your Prescribed Investor Rate (PIR). 

Want to find out what your PIR is? The IRD has the best calculator to work out your PIR

What PIE calculations actually include:

PIE income is calculated based on the type of assets the funds hold (this is where it gets complicated).

• dividends from NZ and Australian shares are considered taxable income (but capital gains from NZ/AU shares are not)

• profits from a company are subject to company tax (currently 28% in NZ). If the company then distributes that profit as a dividend, you’d normally pay income tax on that dividend as well. Without any relief, the same money gets taxed twice. To prevent this, we track the imputation credits (NZ) and franking credits (AU) on all dividends which we use to reduce your taxable income

• interest earned from NZ cash or fixed interest investments is taxable income, and resident withholding tax deducted from these interest payments is applied as withholding tax credits to reduce your taxable income

• for international shares, Sharesies applies the the Fair Dividend Rate (FDR) method, income is calculated as a nominal 5% p.a. return on the daily opening value of each overseas investment (converted to NZD)

• bonds are a bit more complicated. Because the income (and potentially gains) are spread over the life of the instruments, and the currency gains or losses on bonds are considered part of the same financial instrument and are included in the income calculation too

• All foreign investments are subject to withholding tax in the country they are offered, Sharesies is set up to take advantage of tax treaty withholding rates, this reduces the tax collected by foreign governments, we also claim foreign withholding tax credits on these reduced amounts

How does this all work?

Sharesies has developed its own advanced tax system to manage all this.

When a Sharesies fund invests into another NZ managed fund, the underlying fund calculates the taxable income, imputation, resident withholding tax and foreign tax credits on a per unit base and sends this data each day to Sharesies. We then record this in our fund management system.

For other investments, Sharesies calculates the per unit taxable income, imputation, resident withholding tax and foreign tax credits and we record these each day in our fund management system.

What about Crystalisation?

When you sell units or at the end of the tax year we call this a tax crystalisation event.

We calculate your daily taxable income, imputation, resident withholding tax and foreign tax credits based on the per unit data held in the fund management system—and the number of units you held in each fund for each day using data held in our registry.

Fees are deductible expenses, another advantage of PIE funds is that we use your KiwiSaver fees to reduce your taxable income

We multiply your net taxable income by your PIR and this is the amount you owe for tax. If you have paid more in fees than you earned or your investment income is negative, you will get a tax refund.

We take care of paying what you owe to IRD by selling units where the tax liability arises — or if you are owed a refund we apply to IRD and invest the refund according to your investment plan instructions.

We publish an annual tax certificate for each member of the Sharesies KiwiSaver Scheme each year, which you’ll find in the app in the ‘View Documents’ section.

We file IR852 returns for each fund every month and at the end of the financial year we also file IR853 and IR854 returns.