KiwiSaver fund providers are being told they should take more responsibility for making sure customers are paying the right amount of tax.
Inland Revenue logo Photo: wikicommons
Inland Revenue is contacting 450,000 people to advise them they are on the wrong tax rate for their KiwiSaver and other managed funds. Just over 120,000 letters have gone out so far.
A massive computer system overhaul for IRD means the agency now has better oversight of people's tax rates.
For some this was good news - with tax rebates now automatically calculated and issued - but for others it means being confronted for the first time about unpaid tax on their KiwiSaver.
Financial author Mary Holm said many were probably paying too much tax.
"Unless you tell the provider otherwise - and the provider should ask you about your income to try and work out what's the correct rate for you - but unless you tell them that you're on a lower income and therefore should be on a lower rate, the default is for you to be on the highest rate, the 28 percent rate."
She said this would have a huge impact for those who had been on the wrong rate for years.
"Some people are in KiwiSaver for decades and if they're paying too high a rate over all those years they could end up with $50,000 or $100,000 less money at retirement."
All KiwiSaver funds are portfolio investment entities (PIE) which means a prescribed investor rate (PIR) is applied, rather than a Resident Withholding Tax (RWT) rate.
A PIR is based on a person's income - including income from other PIEs - over the last two financial years. It could be 10.5, 17.5 or 28 percent.
Unlike RWT- if you overpay you cannot get a rebate.
Ms Holm said those earning over $48,000 a year would fall into the 28 percent bracket, but for those earning less than that, it could be difficult to calculate the right rate.
She said the fund providers should do more to make sure their customers were on the right rate.
"They are, after all, being given all of their business by the New Zealand tax payers. The providers are making a lot of money from it. I think maybe they have to do a bit more work on making sure people are not paying too high a tax rate and not paying to low a tax rate."
The manager of Simplicity fund provider Sam Stubbs said under law all 27 providers were required to remind their customers annually to check their rate.
"We don't think that an awful lot of people have actually paid attention to that reminder very much and they just assume that their tax rate stays the same all the time," he said.
However, he said it was surprising that many people appeared to have been on a lower tax rate - and not paying enough - given that the default rate was the highest one.
"So I think what most people have done is they just haven't known and they may have took picked the lowest PIR rate assuming that's what they hoped they will be taxed at, but obviously for many it'll be a high number."
Mr Stubbs said consumers generally did not have to pay any attention to their tax and often put it in the too hard basket.
"We live in a country where people don't have to pay too much attention to their tax rate, most of the work us done for them, but in this instance they do have to pay attention."
"It's perfectly understandable why they would not pay to much attention but the IRD's given them a very sharp reminder now."
He said this year was likely to be a one-off.
"All the KiwiSaver managers have had a surprise too because of course all our call centres have been flooded because of this so hopefully this is the only year this has to happen."
