Revenue Minister says he's embarrassed furore over KiwiSaver 'tax grab' forced backdown decision before lunchtime; blames headlines, small funds who didn't back it and banks defending profits

So it actually was gone by lunchtime.

Revenue Minister David Parker says he's embarrassed he and Finance Minister Grant Robertson had to abandon the Government's plans to extend GST to all funds management fees this morning. Parker said he made the decision with Robertson after the "furore" that blew up in the 18 hours since it was included without an announcement in a package of technical changes.

He confirmed to reporters in Parliament the decision was made Wednesday morning. The announcement of the backdown was released at 1.16pm, less than a day after the changes were tabled in an 'omnibus' bill of tax tweaks before Parliament. 

Parker agreed he was embarrassed by the turnaround, given he had defended it to the hilt just this morning on RNZ. He blamed 'mis-reporting' by the media, smaller fund managers for not supporting it, the big four bank owners of other fund managers, the Opposition for misrepresenting it and the IRD for under-estimating the reaction. He said the Government had decided to reverse the decision to protect the reputation of KiwiSaver.

"It wasn't a tax on KiwiSaver. That's been terribly misreported by the media. It was a proposal to even up the GST paid to KiwiSaver providers," Parker said when asked about the tax 'backdown.'

"We were expecting some of the smaller fund managers to support this. None of them have been (supportive). The clarion call against it risks undermining public confidence in KiwiSaver, including misrepresentations that this was a tax on KiwiSaver contributions or their returns, which it never was. But we weren't willing to put KiwiSaver in jeopardy," Parker said.

"The public backlash is, in part, because people were misinformed that we were taxing their KiwiSaver contributions when we weren't," he said.

'We didn't think it would be an issue'

Parker said the Government had expected funds would absorb much of the increase through lower profits, although IRD had advised otherwise.

Asked if all the $225m in extra taxes would be passed on to KiwiSavers, he said: "It depends what would be the competitive response to New Zealand fees. New Zealand fees are already higher than they are in Australia. Even though in Australia, they already have the GST treatment that we were proposing."

Asked why he had defended it this morning, but backtracked by midday, he said: "We weren't expecting the backlash that we've experienced against this."

He argued that was the reason it had not been included in the news release announcing the tax changes.

"It's one of the reasons why we're doing we were highlighting other issues like the reduction in fringe benefit tax, the changes to GST on Airbnb, and Uber. So this backlash has been a surprise to us based on the information that we had from Inland Revenue, which was that there was some providers that were in favour of the change."

Parker would not name which funds had supported it.

He denied the Government had tried to 'sneak it through.'

"Not a all."

Media, banks, funds and IRD blamed

He was then asked about his blaming the media for the reaction.

"Well, one of the headlines, and one of the major newspapers said that this was a tax on KiwiSaver. So it gave people the impression that their KiwiSaver savings were going to be subject to GST, which was never the case. Now we are the parents of KiwiSaver. It's the other side that have undermined it by withdrawing tax credits and subsidies for fees etc. And we just weren't willing to put at risk the reputation of KiwiSaver," Parker said.

"I can blame the media and in respect of misrepresentative headlines which suggested that GST was going to be charged on KiwiSaver contributions and the funds that people have in KiwiSaver," he said.

Asked if he had 'read the room wrong,' he said: "Maybe I shouldn't have been surprised at how well banks defend their profits. They're the owners of the big KiwiSaver firms."

He rejected the advice of both the IRD and FMA, who estimated it would reduce funds under management over time. The FMA estimated a reduction of over $160b in total by 2070.

"They've made no allowance for what would be the competitive response in an increasingly competitive KiwiSaver market," he said.

Parker also blamed the Opposition for putting KiwiSaver's reputation at risk.

"The reaction to the proposal has been overblown, and it's included assertions that it was a wealth tax...that was one of the assertions from one of the providers. Someone else said that it was going to be a tax on KiwiSaver, implying that it was a tax on KiwiSaver contributions. And that has been one of the reasons why people who have KiwiSaver accounts have been so alarmed.

"The effect on fees would have been far lower than the changes made to the KiwiSaver scheme by the prior government when they took away the tax contributions," he said.

Asked if it was the banks' fault for the reaction, he said: "They're the big winners today."

'We did it to save KiwiSaver's reputation'

Asked again why the Government had made the u-turn, he said: "Because we thought that the reputation of KiwiSaver in the meantime was being besmirched in the way that undermine public confidence in it."

Asked if the u-turn was embarrassing, he said: "We would obviously have preferred that the people that we thought were going to come out in support of this had.The fact that they haven't causes us to reverse our position. We think that's the right thing to do. Because we think that the furore around this was denting public confidence in KiwiSaver."

"There has been engagement with the the funds management sector before this proposal came out. And the feedback that I had from the Inland Revenue Department was that there were some in favour and some against."