Cullen looking at tTE now, not TET

Finance minister Michael Cullen has ruled out offering tax incentives for retirement savings as the Government can't afford them at present.

"Big structural changes for general retirement savings away from the current TTE system toward a tTE regime will not be proceeded with this term as there is simply no fiscal room in this year’s budget."

In the past he has flagged his preference to change the tax system for savings from the current TTE (taxed, taxed, exempt) regime to a TET one.

However, he is now talking about a tTE regime.

However, Investment Savings and Insurance Association (ISI) chief executive Vance Arkinstall says if some sort of incentives are going to be introduced the exemption (or the e) has to be at the front.

"An E up front is, in our view, the best option," he says. The logic behind this is that it is the option which is most obvious to savers. But it is also potentially the most expensive option.

Currently the association is doing some modeling work on the impacts and costs of various different tax regimes. Likewise Treasury has done a report which examines some of the options, and their costs.

An ETE regime is the worst option as it is incredibly expensive, while TeT takes about 50 years to really kick in. An EeT regime, where investments are taxed at 21% has a high initial cost before producing benefits.

Arkinstall says if the Government doesn't offer tax incentives, then the only other option available is compulsion.

"We are not calling for compulsion," he says.

Cullen's comments on changes to the tax system have surprised a number of people because they weren't expected.

Some have taken them to mean tax incentives are off the agenda altogether. Arkinstall, however believes Cullen was really just signalling that they are off the agenda at the moment because of budget constraints, so don't expect to see anything in next year's budget.

He says the minister is continuing to explore options.