No GST on KiwiSaver, what about charging it on mortgages?

The news exploded this week. GST was set to be charged on KiwiSaver fees. A fee of 1% would become 1.15%.

Then boom. It was over-turned and the government backed off.

I’m no fan of higher costs for investors, but the outrage was a cooked-up PR stunt run by a powerful industry. It took a mere 24 hours to get the money back in the hands of fund managers.

They rounded up their regulator (the Financial Markets Authority), the industry body (the Financial Services Council) and tax accountants who profit handsomely from structuring advice – ensuring fees are as GST exempt as possible.

The regulator delivered its ransom note, signalling GST would be passed on to KiwiSaver investors and this would punish each of us to the tune of $20,000, or $103 billion in total, when modelled to 2070 - in 48 years’ time.

The cherry on top was convincing the leader of the opposition to label this a “retirement tax” he wouldn’t stand for.

In an industry making extraordinary profits, it was equally extraordinary to watch their success. A PR masterclass designed to cause political outrage, while not delivering any balance to the argument, incriminating themselves, or discussing that some savers are paying GST already, because the status quo is a bit of a shambles.

In my view, for many of the higher charging managers, GST could and should have been absorbed if the policy proceeded.

In 2070 when I’m 100 years old, will I remember this 0.15% fee? Unlikely, not because of senility, but because it pales in comparison to the amounts of money fund managers are wiping off our accounts.

By switching to a cheaper manager many of us could save double the GST charge, if not more. By choosing a balanced fund over a conservative fund we could increase our returns by 10 to 15 times the GST charge.

On this basis the real headline is investors could have $200b wiped off their savings by staying with expensive managers and a back-of-the-envelope $1000b wiped out when you add the failings of investor education, high fees and inappropriate fees.

Will the regulator admit any of this? Maybe, quietly, but they won’t headline it in a PR stunt. They’ve not reined in higher-charging firms, eliminated performance fees, or got rid of account fees.

They’ve stood by, gently prodding managers while investors languished in default funds for over a decade (balanced funds have finally been mandated). They allow managers to run the show at their own pace.

Imagine getting some outrage and action on the trillion-dollar catastrophe in 24 hours.

If Christopher Luxon had taken a moment to shine the mirror back on the messengers, he may have found he’d just become the puppet of wolves in sheep’s clothing.

If David Parker had stood up and called out the obvious hypocrisy in the industry message, it would have made for a far more balanced discussion of the place in GST exemptions in financial services.

Don’t get me wrong – it’s a good thing for investors.

Had this gone into law, it would have cost us money. The ransom note confirmed it. Absorbing GST isn’t a stick they’ll allow themselves to be poked with.

Fee reductions are all stage-managed at the most painstaking snails-pace possible, while our market regulator cajoles.

GST exemptions for financial services

Last week's GST saga brings exemptions in the financial industry into focus. Our mortgage, rent payments and certain fees paid on retirement schemes have been GST exempt.

How long can that continue? Given the wealth gap between those with savings and houses and those without, it’s clear where the tax target might be.

In terms of a future tilt, taxes aimed at our assets is an agenda we need to take seriously.

We are in desperate need of new mechanisms to control the housing market and inflation in general.

The official cash rate (OCR) is a blunt tool which feeds into rising mortgage rates, less spending, lower consumption and eventually falling prices on homes and the goods we buy.

Could we assist the role of the Reserve Bank by removing exemptions from the financial services sector and charging GST on mortgage interest? It might feel like an odd suggestion, but why do we exempt this activity?

The government could be taking a cut and using it as a bolt-on tool to the official cash rate.

Interest rate increases create more profit for banks. Homeowners quickly get charged higher rates, while depositors lag. There’s more room to expand margins in higher-interest environments.

Banks are the unintended profiteers of the Reserve Bank stabilising the economy.

Keeping the cash rate lower and charging GST on mortgage interest could put some money into government hands.

It also aids as an alternative to capital gains tax. No politician of any persuasion appears willing to dance with CGT on second homes, but GST could provide a variation.

Opinions are a personal view and general in nature. They are not a recommendation for any individual to buy or sell a financial product. Readers should always seek specific independent financial advice appropriate to their own circumstances.