In our last "Articles" (click here to read to previous article) we canvassed the views of the major political parties on superannuation issues. The convergence of political party views around the desirability for tax concessions for superannuation savings may have been partly the reason this topic didn’t gain traction as an election issue.
Labour is now seeking the best way to provide a 6% tax advantage on superannuation contributions for all savers, not just for those in the top tax bracket. This would be a material and desirable encouragement to long- term savings.
A voluble minority are fooled by macro economic arguments and have concluded that the total volume of savings may not increase. They should look more closely at what has happened to so many employees whose savings have declined since tax incentives for superannuation in New Zealand were taken away years ago. More people than ever are becoming dependant on New Zealand Superannuation.
We hope Labour finds a simple way to effect such a tax advantage for all. The present 6% tax advantage for those earning over $60,000 pa is correspondingly matched by the Fund Withdrawal Tax (FWT) provisions. This FWT legislation is a nightmare, and a requirement to test all benefit payments to see if the tax might apply would be like taking a sledgehammer to a nut. This FWT legislation was enacted because schemes may permit payments to members whilst they still remain in service. In other words, long term superannuation savings may not actually be long term.
Common sense tells us that it is inappropriate to allow most in service payments from a registered superannuation scheme. They seldom have anything to do with the member’s long term financial needs. If these in service payments were not permitted, we could do away with the costly and cumbersome FWT legislation.
Where there is a tax advantage, there are smart people trying to leverage that advantage. In particular it is obvious that if superannuation is tax advantaged, there will be encouragement to pass all company insurance premiums for death, disablement, trauma, income protection and health insurance through the company superannuation scheme, as well as scheme costs that are currently borne separately by the company. A tax concession intended for savings would become a wider tax concession on providing employee benefits.
We need a clearer definition of what a registered superannuation scheme is, and what benefits that registered scheme can be permitted to pay prior to retirement, particularly prior to leaving service.
Any new tax advantage on contributions to a registered superannuation scheme will only be a successful encouragement to long term savings if the FWT legislation can be scrapped and the definition of a registered superannuation scheme cleaned up.
Source: This report was prepared by AON Consulting.
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