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Workplace super changes more complicated

Official jitteriness about bogus income “recharacterisation” appears to be behind measures that make the government’s proposed changes to workplace superannuation more complicated than earlier signalled.

Thursday, August 28th 2003, 10:22PM

by Rob Hosking

The measures, contained in the latest omnibus tax bill before Parliament’s select committee, aim to bring the specified superannuation contribution withholding tax into line with the employee’s marginal tax rate, rather than the current flat rate of 33%.

The change does impose higher compliance costs onto employers, which is why the government has made it voluntary.

The government also yesterday announced it would allow those on less than $9,500 a year and belonging to an employment based super scheme to have the employer payments to their funds taxed at just 15%. Finance Minister Michael Cullen credited the Green Party with advocating the move, although he conceded there must be few employees on that low an income who are members of such a scheme.

The main proposal before Parliament though has an unexpected wrinkle in it: it includes a formula to ensure that payments made above the $38,000 threshold are taxed at the employee’s marginal rate. One option considered by officials – and endorsed by Business New Zealand – was to allow employees whose superannuation contributions might push them above the threshold to remain on 21% rate.

Business New Zealand’s submission on the bill notes that the formula that will be used as a result of this policy makes the change more complex for employers, and notes that the change – which it supports as it should boost savings – does add some level of compliance costs.

Officials advice on the proposed change shows constant warnings from officials about the possible tax leakage around the change.

The advice to ministers show a high level of caution around the change, with warnings that employees would recharacterise part of their income as superannuation and thus pay less tax.

There was definite – if polite - official horror at one option, floated publicly by Cullen, of ‘cascading” the current 6% tax advantage possessed by those on $60,000 who opt for a ‘salary sacrifice’ package, down the tax tables.

Even without that, officials warned ministers that some on the top rate are recharacterising their income over the $60,000 mark, and that a fund withdrawal tax, imposed to discourage this, was not preventing people withdrawing funds from those packages. “Extending the present 6% concession rate has a high fiscal cost and it is questionable whether such an increase would increase savings.”

Indeed there appears some official scepticism that the taxing savings at a flat rate of 33% - effectively penalising lower income groups – is in fact a disincentive at all.

“The current treatment may have advantages for some in this group,” one joint Treasury and Inland Revenue paper presented to Cabinet argued.

“Further, it is unclear whether the current tax rate is a significant factor in the decline of employer funds.”

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

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