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Industry experts question crack down

Industry and tax experts are raising eyebrows over the government’s crackdown on “salary sacrifice” packages.

Thursday, February 16th 2006, 6:52AM

by Rob Hosking

Revenue Minister Peter Dunne announced a review of what the IRD has dubbed “extreme salary sacrifice”.

However industry figures suggest the “extreme” sacrifice is minimal – and the government’s own tax take figures appear to raise similar questions.

As Good Returns reported just before Christmas, tax officials have been taking an increasingly beady look at the practice, which involves savers taking advantage of the gap between the top income tax rate of 39% and the 33% top rate for the specified superannuation contributions withholding tax (SSCWT) rate.

The discussion document uses the example of John, an employee on $100,000 a year. Normally he would pay annual income tax of $30,270 but if he opted to sacrifice $90,500 of his salary the total tax on his income and his employer’s contribution would be just under half that - $15,000 – because the SSCWT works on a progressive scale up to 33%.

The IRD has given no figures on how many are doing this. Association of Superannuation Funds vice-president Jill Spooner says although she knows of cases where “people have jigged a few things around” she doubts there are widespread instances of the sort of “extreme” sacrifice the IRD suggests.

“I can only think of one or two cases and mostly they are just managing it down to 33% - which they still will be able to do under the IRD’s proposed solution.”

If there were widespread use of salary sacrifice, with employees sheeting more of their income through savings packages, it would be expected that more SSCWT would be being collected by the government.

There has been a rise – but most of it happened before the new SSCWT regime took effect in April 2004.

The total tax collected for the year to June 2003 was $448 million, Dunne said in response to a written question from National finance spokesman John Key.

The tax take jumped for the year to 30 June 2004 – up to $563 million: the last three months of that year were after the new regime took effect.

The rise did not continue, however – the tax take fell slightly the following year, to $542 million.

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

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