kiwisaver, tax, investing

How choosing the right fund helps you pay less tax in KiwiSaver

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The amount of tax you have to pay plays a big part in what your KiwiSaver balance will look like in retirement and it’s always good to have a better understanding on how our KiwiSaver investments are taxed.

It might seem simple, as your KiwiSaver providers automatically deduct fees and taxes from your investment to pay on your behalf. But you are actually paying different taxes depending on how your KiwiSaver fund is structured. So, do we really know what part and how much of our KiwiSaver investments are taxed?

How are KiwiSaver funds taxed?

Most funds are taxed under the PIE (Portfolio Investment Entity) regime, which means that your KiwiSaver scheme provider taxes your investment earnings based on your PIR (Prescribed Investor Rate) that is capped at 28%.

Note that you are only paying tax on your returns on investment, not the overall value of your KiwiSaver investment. It is important to make sure that you are paying the right amount of tax by providing your KiwiSaver provider your correct PIR.

It depends on the type of investments in the fund

It is important to know that for most KiwiSaver funds, you will not pay tax on your entire investment return. Let’s say for example, your PIR is 28% and you earn an 8% return on your KiwiSaver investment. This does NOT mean that you will pay 28% of tax from all of that 8% return. You will only pay tax on the taxable part of your return and the taxable part of your KiwiSaver investment, which would vary depending on your funds’ asset allocation. This is true for most funds with Growth assets.

As opposed to that, if you are investing a KiwiSaver cash fund with mainly investments in cash equivalent securities including bank term deposits and bonds, all income from there will be taxed. So that means, if you are investing in this type of fund with a PIR of 28% and you are getting a 2% return, you will be paying tax on that entire 2% return.

For example, in the table below we are looking at Milford’s KiwiSaver funds, showing us the effective tax that you are paying on their funds based on its different asset allocation. The Active Growth fund, consisting mostly of shares, has the highest performance since inception date at 12.4% with a return of 11.2% after taxes are deducted.


Milford KiwiSaver Fund

Return at 0% Tax (p.a)

Return at 28% Tax (p.a)

Tax % of Total Return

Tax % of Gross Return

Active Growth




















We can see that in this example, you would be taxed at your PIR on ALL of the return you receive from the Cash fund, while in the Active Growth fund you would be taxed at your PIR on only 32.7% of your returns. To compare the different funds’ overall taxes, let’s take a look at the tax percentage of gross returns. With a PIR of 28% you will be taxed only at 9% on the returns you get from being in an active growth fund, in contrast to being  taxed fully at 28% on the returns if you are on a Cash fund.

Local and international investments are taxed differently

Most KiwiSaver funds have various holdings in New Zealand and international shares, and both have different tax obligations. There is no capital gains tax for investments in New Zealand and some Australian shares. That means, if a KiwiSaver fund invests in a New Zealand company, let’s say Spark, and tomorrow Spark doubles in price, there won't be any capital gains tax owed. For you, this means that the return you get from Spark’s increased valuation is yours to keep and you pay no tax on that. You will only pay tax on the dividends received in respect of your shares.

Most International shares in a KiwiSaver fund are taxed using the FDR (Fair Dividend Rate) method, which assumes that international shares will generate dividend income equal to 5%. This means that under FDR, you are taxed on 5% of the value of your international shares regardless if it goes up or down in value, with no tax on dividends received.

What can KiwiSaver providers do to increase our returns on investments?

KiwiSaver providers optimise their investments to make them as tax-effective as possible by constantly improving the asset allocations of their KiwiSaver funds. They are smart about how they invest, where they invest, and how much they invest, in a way that they can minimise the amount of tax you have to pay, which will increase your overall after-tax returns on your investments.

Getting the correct balance of income and growth assets in their portfolio could make the fund more tax efficient. For example, fund providers could invest more in shares, since return on shares would be taxed at a lower rate than returns on cash investments. But they always have to take into account the risk and volatility that comes with  investing in shares and adjust accordingly depending on the KiwiSaver funds. This would be one way KiwiSaver providers control their investments to create the optimal balance of asset allocation for each fund.

How we can help

As investors, we should look at the underlying investments that make up our KiwiSaver funds to get the most out of our investment. But not everyone has the time to dig deep and analyse every product disclosure statement from a number of different KiwiSaver providers and funds.

Looking at the past performance, fees, and taxes are only some of the many factors that need to be considered before sticking with a KiwiSaver fund. Our financial advisers at National Capital thoroughly perform research into the investments these KiwiSaver funds are putting your money in. We compare different KiwiSaver funds’ fees, performance, tax obligations, etc. to choose the most suitable fund for you.

First, take our KiwiSaver HealthCheck. The process is online, easy, and free. Here you would tell us more about your situation and investment goals to first establish the right KiwiSaver fund type for you. Then one of our financial advisers will get in touch to discuss with you further and to help you structure a KiwiSaver investment plan tailored to you. All of this at no cost to you.

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The right tax-effective KiwiSaver fund will make a big difference to your KiwiSaver payout.

Spending 10 minutes to complete our KiwiSaver HealthCheck form may be the most important thing you can do for your KiwiSaver account right now.


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