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Cullen encourages savings

Anti-avoidance measures announced yesterday that are aimed at stopping high income earners avoiding the new top tax rate of 39 cents are effectively the government's first savings incentiveer

Tuesday, March 28th 2000, 12:00AM

by Philip Macalister

Anti-avoidance measures announced yesterday that are aimed at stopping high income earners avoiding the new top tax rate of 39 cents are effectively the government's first savings incentive.

Under the proposals, which have yet to be passed through Parliament, high income earners can avoid the 6 cent tax increase on earnings over $60,000 by having their employer divert money into a registered employer-sponsored super fund.

The catch is that the money has to stay in the fund until the employee has left the job, reached retirement or suffered a hardship.

Withdrawals that fail to meet any of these criteria will be subject to a 5 per cent fund withdrawal tax.

The tax will be limited to the percentage of the employer contribution withdrawn, and will not affect employer contributions made before 1 April this year.

"The measure is designed to prevent high-income earners avoiding the tax increase by arranging to have a portion of their salary substituted for employer contributions to superannuation funds which can be drawn on at any time," Finance minister Michael Cullen says.

There are divided opinions on the new tax. Investment Savings and Insurance Association chief executive Vance Arkinstall is very pleased with the announcement.

"Today’s announcement represents a sound balance between encouraging high income earners to save through employer superannuation and protection against abuse of the taxation system. The approach is simple, it will assist to increase genuine superannuation savings by higher income earners without loading additional costs and complexity on employers," Arkinstall says.

However, Deloitte Touche Tohmatsu tax partner Greg Haddon says the move is yet another piece of ad hoc tax policy. He says it is complex and will be difficult to administer.

"I feel these changes may cause some schemes to close."

He says some schemes may be frozen because of the difficulties in administering the changes.

Meanwhile, Cullen also announced that he has plans to address what has become known as the Tolis issue - that is the problem of people on marginal tax rates of less than 33 per cent being overtaxed in managed fund products.

"We are also concerned about the long-standing problem of the 33 percent rate applying to the superannuation schemes of people who earn less than $38,000 a year and have a marginal tax rate of 15 or 21 percent. Their employer contributions are being over-taxed. For this reason we intend to investigate ways of lessening this effect," Cullen says.

What do you think? Is this a good idea? Will it encourage people to save more money?Have your say in the DISCUSSION FORUM

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