Review supports TTE, not TET

The first release from the Government’s Tax Review panel has come out broadly in favour of the current tax treatment of savings.

Thursday, June 21st 2001, 11:39AM

by Rob Hosking

The Government’s Tax Review panel has come out broadly in favour of the current tax treatment of savings.

The taxed-taxed-exempt (TTE) approach currently used, which taxes the original income, plus the returns on the savings but exempts the withdrawal of those savings, is probably the best available tax treatment, the panel says. Although it does explore options for reducing the tax rate on earnings from savings – i.e. a TtE approach – in its first issues paper.

This view is at odds with the TET regime currently being advocated by Finance Minister Michael Cullen.

"The panel is not convinced that tax concessions would benefit national saving, and therefore favours retaining the present TTE regime," panel chair Robert McLeod says.

The official rate of saving in New Zealand is around 2% of GDP – a figure made up of aggregate savings by householders businesses, and the government.

A truer measure would also include investments in education and consumer durables, the panel says. If these were included the total value of savings would be around 20%.

New Zealand’s saving problem is not low savings, but rather poor quality savings, the panel says.

"New Zealand’s comparative lacklustre economic growth over the past two or three decades is attributable more to our earning a low average rate of return on investment than to a lack of investment," the report says.

The key issue for tax therefore is whether or not the system encourages households to invest savings in poorer performing assets.

It is this issue which is behind the recommendation of a tax on the family home – a recommendation which the panel concedes does not have a great chance of being implemented but one which its members thought should be a focus of public debate.

The tax, if implemented, would bring in $750 million a year to the government at current rates, and would also deflect some New Zealanders to investing in other assets, the panel says.

"A substantial amount of capital would flow elsewhere," McLeod says.

Cullen and other political parties have been quick to distance themselves from the panel's recommendation.

However, the political difficulties are only the start of the problems with the idea, PriceWaterhouseCoopers tax partner John Shewan says.

Shewan is broadly complimentary of the report: "it addresses the issues that needed to be addressed, and it's going to be useful not only for the professional community but also for the politicians."

He says there are major practical problems with such a tax on the family home.

"It would be fairly easy to avoid with devices such as family trusts, and overall I suspect it would be wonderful for the accounting industry but very unproductive for the overall economy.

"There is also a liquidity issue – a retired person would probably not have the cash flow to pay the tax. In those cases it would effectively be a death duty by the back door, because people would not be able to pay it until after they died and their estate is wound up.