Over a lifetime of saving through your KiwiSaver scheme, the amount of tax you pay on investment returns plays a big part in how much money you’ll have available in retirement. So, it’s good to understand just how tax applies to your KiwiSaver.

How are my contributions taxed?

Your own contributions to your KiwiSaver scheme are made out of your earnings after tax has already been taken out.

The contributions your employer makes to your KiwiSaver account are taxed, based on a rate similar to your marginal personal tax rate, ranging from 17.5 per cent to 3 per cent.

What about my returns?

The vast majority of funds are Portfolio Investment Entities (PIEs) for tax purposes.

That means that your fund uses special PIE tax rules to calculate the income of the whole fund, then applies your tax rate just to your share of that income. The fund is like a big pie and you get taxed only on your piece.

And sometimes your fund gets tax back too. It also gives you a share of any tax credits the fund received, such as ‘imputation credits’ on New Zealand dividends and foreign tax deducted from overseas dividends and interest.

So, what are imputation credits? They were brought in by the government to avoid share dividends being taxed twice. Listed companies pass this tax credit to shareholders as imputation credits.

If you have tax to pay after deducting the credits, your KiwiSaver provider pays that tax to the Inland Revenue department for you.

Stop worrying now

As long as you chose the correct tax rate, you don’t have to do anything. It’s all done for you by your KiwiSaver scheme provider.

Nor do you have to include the income from your KiwiSaver account in your tax return, if you have to file one.

When your KiwiSaver provider is calculating the income that you need to pay tax on, it will deduct expenses incurred in earning it, such as the fees you pay to your fund manager.

In some cases, where the amounts you can be taxed on are low, the deductions can be higher than your taxable income, and you’ll have a tax loss for the year.

This loss is worked out with your tax rate to create a tax refund, which Inland Revenue pays directly to the fund. The fund then credits you with additional units. So, in effect, you reinvest the tax value equating to the loss in your savings.

What investment returns are taxed?

Different tax rules apply to different kinds of investments that your fund makes. Here are the rules:

Withdrawing money from KiwiSaver

When you make withdrawals from your KiwiSaver account, either for a first-home purchase or when you reach 65, there’s no tax to pay, as it’s automatically taken out.

What tax rate applies to me?

Your tax rate is linked to the rate you pay for other income, but may vary slightly. It’s called your PIR, or Prescribed Investor Rate. There are three main rates:

· If your taxable income from your own earnings and your savings in KiwiSaver and any other PIE funds exceeds NZ$70,000 in each of the past two years, your PIR is 28 per cent.

· If your taxable income from these sources in either of the previous two years is below NZ$14,000, your PIR is 10.5 per cent. Otherwise it’s 17.5 per cent. Each year, your KiwiSaver provider will ask you to confirm your PIR.

· If your circumstances have changed, it’s important to update it. If the PIR you give is too low, you could end up having to file a tax return and could be taxed on your KiwiSaver income at your full marginal tax rate, which could be higher than your PIR.

· If you pay too much, you’ll never get it back. The IRD rules don’t allow it to refund overpaid KiwiSaver tax.

How will you know how much tax you paid?

At the end of each tax year ending 31 March, your KiwiSaver provider will send you a statement that sets out the taxable income allocated to you and the tax that was paid on your behalf, or the refund received.

Why is my taxable income different to my investment returns?

You might notice that the taxable income allocated to you in a year is different to the statements you get from your provider explaining how it has performed and how much your balance has changed.

That’s because not all the gains and losses in your fund are taxed. If your fund has made large gains on New Zealand and listed Australian shares, your taxable income may be much lower than your fund gains.

If your fund has a lot of international shares, the taxable income may be higher or lower than the 5 per cent return you’re taxed on.

The key thing to remember is to give your KiwiSaver provider the right PIR tax percentage – then the rest is done for you.

First published 4 December 2018

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.