Around May and June each year, KiwiSaver annual statements land in inboxes. Your statement includes a summary of your contributions, returns, fees and PIE tax.
If you’ve ever wondered why tax gets taken from your KiwiSaver account, or whether you need to do anything about it yourself, you’re not alone. Here’s a plain-English breakdown of how it all works.
Your KiwiSaver account earns taxable income over time — things like interest, dividends, and income from certain overseas investments. Just like interest on a savings account, that income is subject to tax.
You don’t have to worry about calculating or paying it yourself. Your KiwiSaver provider handles it on your behalf, deducting tax from your investment returns and paying it directly to Inland Revenue. The annual statement you receive shows exactly what was paid — which is why this time of year tends to prompt a few questions.
It can feel like double taxation, but it’s actually two separate things being taxed. Your salary is taxed as income. The taxable income your KiwiSaver fund earns — things like interest and dividends — is taxed as investment income. This is the same as interest earned on a bank account, where your bank automatically deducts tax on your behalf.
With KiwiSaver it works the same way — tax is handled automatically by your provider, so there’s nothing extra for you to file or pay at the end of the year. And because PIE tax is paid along the way on the income your fund earns, when you eventually withdraw your KiwiSaver balance at retirement, that money comes to you tax paid. There’s no further tax to pay on the way out.
KiwiSaver is a type of managed fund called a Portfolio Investment Entity, or PIE. PIEs have their own tax rate — called a Prescribed Investor Rate, or PIR — which is separate from your personal income tax rate, and sits at one of three levels: 10.5%, 17.5%, or 28%.
With a regular bank account, interest is taxed at your personal income rate via Resident Withholding Tax (RWT) — which can be as high as 30%, 33% or 39%. With KiwiSaver, investment tax is capped at 28%. If you earn more than $53,500, that means more of your money stays in your account and keeps growing over time.
It’s worth knowing that PIE tax is charged on your share of the taxable income your fund earns — things like interest, dividends, and income from certain overseas investments — not on the overall growth or value of your account. This means it’s possible to have PIE tax deducted even in a year when your balance has gone down. If your fund earned dividends or interest during the year but the value of some investments fell, tax is still payable on that income.
No. Your KiwiSaver provider takes care of this. Tax is calculated on the taxable income earned in your fund, deducted automatically, and paid to Inland Revenue on your behalf. You don’t need to include your KiwiSaver returns in your personal tax return.
Inland Revenue also shares PIR updates with KiwiSaver providers throughout the year, so your rate may be updated automatically if your income changes. That said, it’s still worth checking your PIR is correct. If your rate is set too low, you could end up with a tax bill at the end of the year. If it’s set too high, you’ll pay more tax than necessary. Inland Revenue reviews your PIE tax as part of the end-of-year income tax assessment and will correct any over or underpayment at that point — but getting it right from the start means your savings are working as hard as possible.
You can check your PIR on the Inland Revenue website. If it needs updating, just get in touch and we can make that change.
PIE tax is deducted in a couple of situations, which is why it can sometimes come as a surprise.
For most people, it happens once a year. Your provider calculates and deducts the tax owed shortly after the end of the tax year on 31 March — typically in April. They do this by redeeming a small number of units from your fund to cover the amount owed, so your balance adjusts slightly at that point. If Inland Revenue determines you’ve overpaid, any rebate is paid directly into your KiwiSaver account, and if you’ve underpaid, they’ll let you know.
Tax is also deducted when you make a withdrawal or transfer your funds between providers or funds. In those cases, your provider calculates any PIE tax that has accrued up to that point and deducts it at the time of the transaction. This is why you might see a tax deduction on a first home withdrawal, a retirement withdrawal, or a transfer — it’s not an additional charge, just the tax on the taxable income earned in your fund being settled at that point.
Annual statement time is a good prompt to check. Head to the IRD website to find your PIR, and if you need to update it with us, get in touch and we’ll sort it out.
Talk to your Adviser today or get in touch with the Aurora Client Care Team
0800 242 023
hello@aurora.co.nz