The government has swiftly abandoned plans to raise an extra $225 million a year by imposing GST on fees charged by KiwiSaver providers and other fund managers.

The move follows a ferocious political backlash against the proposals, which lasted less than 24 hours after their introduction without public notification in a routine ‘omnibus’ tax bill.

A statement from the revenue minister, David Parker, sought to place blame on the move getting as far as legislation on advice from the Treasury and Inland Revenue Department.

“Inland Revenue and Treasury advised this change be made to remove a loophole used by large financial companies, so they would have to align with how others in New Zealand pay GST.”

National party leader Christopher Luxon had immediately branded the move a “retirement tax”.

The regulatory impact statement accompanying the bill had warned that as much as $186 billion of KiwiSaver and non-KiwiSaver funds under management would be lost by 2070 because the policy would reduce overall returns and discourage retirement savings.

“Because of the importance of public confidence in KiwiSaver and the need to ensure nothing unduly affects New Zealanders’ willingness to save, the government will not go ahead with the proposal contained in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill,” Parker announced.

During consultation, he said it had appeared that large KiwiSaver providers opposed such a change while smaller players, some of whom were already paying GST, supported it.

“However, since the announcement it has become clear that smaller providers now oppose it too,” said Parker, who has also been copping flak for the IRD’s handling of the cost-of-living payment, which has been paid to ineligible New Zealanders, such as those living overseas.

An auditor-general’s report this week was highly critical of the way the first tranche of payments was managed and this week’s second payment involved tighter criteria.