Cullen renews TET idea

Finance minister Michael Cullen is again seriously looking at changes to the tax system to encourage long-term savings.

Wednesday, March 5th 2003, 10:08PM

by Rob Hosking

Finance Minister Michael Cullen’s "TET offensive" looks like being back on the political agenda.

The current method of taxing savings – TTE – taxes the initial income, then the earnings from any savings, but leaves exempt those savings when they are drawn upon.

Dr Cullen has favoured moving to a ‘TET’ model, exempting the earnings from any accumulated funds but taxing them when they are drawn down.

The Treasury initially talked him out of this approach (it involves the government making some sacrifice of revenue up front) due to fiscal constraints.

Now, with surpluses running well ahead of forecast, Dr Cullen is looking at the issue again.

"If we can do something about the middle ‘T’ I think we can move towards a more favourable regime for savers," he said.

"There’s various options – some might go so far as having E in the middle, and an optional structure for certain sorts of long term savings.

"It comes down to a fiscal issue - it’s a question of how you do this without giving yourself huge fiscal anguish over the initial five to 10 years."

Any change would take "a year or two", he said, and he conceded that his officials are still not keen on the idea.

"The TTE approach is pure tax neutrality, if you like, but I can’t help feeling its had something to do with our long slow side form a not particularly good savings rate to a pretty pitiful one."

Someone on an ordinary income, in their early 30s, is at present faced with a regime that over-taxes their savings if they put it in an employer-based scheme, and then over-taxed again on the earnings from those funds.

"Their one hope is that, over the next 35 years of their working life, no future government is going to change the rules. It’s a hell of an awful package to try to sell somebody in the middle years of their working life."

He again ruled out any reduction of tax at the front end.

"(Some in) the industry would like to have an ‘E’ or a small ‘t’ at the front end. Well, who wouldn’t? But that’s not going to happen."

Dr Cullen has already promised to remove the current over-taxation of employer-based savings schemes in this year’s Budget, and he says lowering the tax, or making exempt, of earnings from money saved is complementary to that.

That Budget initiative will be followed by a push from government, the Retirement Commissioner, the financial services industry and business groups to encourage workplace-based savings.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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