Kiwisaver's Hidden Cost

I was having a coffee with the CEO of Kernel Wealth, Dean Anderson, the other day and he had a very interesting analysis he compiled.

He called it: The Kernel Guide to Taxation of Foreign Equities for New Zealand

Normally, such a study around tax I would begrudging read, but this really shined some light around the potential inefficiencies of ETFs (Exchange Traded Funds) and also funds that front as tax efficient PIE Funds(Kiwisaver etc..) but when you look under the hood it leaves a lot to be desired.

Dean and I don’t have any affiliation. I just feel he is adding some valuable insights to the space which I’m more than happy to shine a light on. So instead of me misrepresenting his words here’s an exert from his newsletter:

"This 10 page guide will talk you through the tax implications of investing via various investment vehicles into international equities. Specific mention is given to the tax leakage associated with AUTs, the value of being able to switch between tax methods, and a short note on NZ equities.

The tax structure matters a lot. For an investor on the top marginal tax rate investing in international equities, tax will reduce your long-term return by between 1.2% and 2.6% depending on how you invest. For Australian equities, the tax drag ranges from 0.8% to 2.3% per annum.

The paper is modelled on the expected long term global equity returns of 2.5% yield and 7% total return…

Understanding Tax and Trading Costs for NZ ETFs and Index Funds

While we are on the subject of tax, I want to cover off the key difference between NZ Listed PIEs and unlisted Multi-rate PIEs.

Tax - New Zealand ETFs are classed as Listed PIEs, which means the tax rate is fixed at 28%. If you pay a lower tax rate, you'll have to claim the overpaid tax from the IRD on your tax return at the end of the financial year. This will appear as a credit to offset any other personal tax. If you are investing for a child or charity, where there is no other taxable income to offset the tax credits against, you may be over taxed using an ETF.

Unlisted index funds are different - tax is deducted at the correct PIR rate, through the Multi-rate PIE structure, and paid directly to the IRD at the end of the financial year or on exit. Unlike ETFs, index funds don't have a tax effect which sees a portion of your investment sitting as idle cash until tax return time.

Trading Costs - buying and selling ETFs incurs costs - brokerage (buying and selling fees) and price spread. Index funds avoid brokerage, and can avoid spreads by covering underlying transaction costs from the manager fee, as Kernel did when we launched our global equity funds."

Read the Full Guide Here:

Kernel International Tax Guide 2020
Download PDF • 3.18MB