The removal of the surcharge
The superannuation surcharge may be gone - but for how long? Philip Macalister looks to the future and he looks at what strategy investors should take now the tax is gone.
Sunday, April 5th 1998, 12:00AM
To say the superannuation surcharge tax was hated by those who felt its effect immediately would be understating a fact. It was reviled by that group - superannuitants.As they were the ones who felt its impact most strongly they were the ones who revolted against it and finally, with the help of New Zealand First, got the National party (after eight years) to honour its promise to scrap the tax.
While the surcharge, as we knew it might have gone, it is more than likely to come back in another reincarnation.
The two drivers to its reintroduction are intergenerational equity, and a Government desire to reduce the cost of NZ Super.
As University of Auckland economics department lecturer Susan St John predicts the X generation will revolt against the New Zealand Superannuation as it is now structured.
Superannuitants, post April 1, 1998, now have a universal benefit that is in stark contrast to many other groups in our society, she says.
Secondly the Government is likely to want to find some other way of means testing or targeting super.
The Jeff Todd-chaired Period Review Group (PRG) on superannuation has given them some ammunition for this battle. The report, which was released in December, spends a good chunk of its time talking about options for integrating public and private provision - which is a euphemism for reintroducing the surcharge.
The report outlined five options for "integrating" the two and it's only a matter of time before this debate is kicked off again.
Todd told a conference on Superannuation in February that if the current system of a state pension topped up by private savings is to continue there needs to be some form of integration.
"With the abolition of the surcharge there is no longer a means of reducing NZ Super as a person's other income increases. For this reason, we spent some time looking at ways in which private and public provision can be integrated again."
Todd says reintegration should happen by 2015 at the latest, but consideration should be given to integrating public and private provision in the nearer term, particularly on the grounds of intergenerational equity."
He says the mechanism chosen must satisfy the tests of adequacy, equity, efficiency and sustainability.
The Government are understood to be working on the issue and the Investment Savings and Insurance Association (ISI) has commissioned actuary Jonathon Eriksen, economist Gareth Morgan and lawyer and former minister of finance David Caygill to take the PRG report the next step.
That report is due to be released in about a month's time.
What should investors do now the surcharge has gone?
The first thing is that many taxpayers who potentially fell into the grasp of the surcharge rearranged their affairs to minimise its effect.
Good Returns has heard of cases where millionaires have rearranged their affairs to the extent that they qualify for a Community Services Card.
Notwithstanding though there are thousands of New Zealanders who have been impacted by this tax that pushed some superannuitants onto a tax rate of 58 per cent.
Its introduction fuelled growth in product classes such as insurance bonds, and these are now feeling the pinch. (The irony of this is that people are told not to make investment decisions based on tax reasons, yet life offices and fund managers offered products which are designed to do just that).
Managers have become sensitive about the negative sentiments about the insurance bond sector, and not many are prepared to openly discuss the issue.
The evidence of what is happening is clear in fund flow figures. Investors have been avoiding insurance bonds for some time now and managers are winding down these products (see Breaking the Bonds).
Also a number of managers have created new or mirror funds under the unit trust regime to offer investors a suitable, tax-effective alternative, that offers greater transparency and accountability.
IPAC Securities research manager Mark Long says in the latest Adviser magazine that "it appears at this time that the future for insurance bonds as a viable product type looks decidedly uncertain."
While the picture isn't rosy, insurance bonds and products of their ilk aren't going to disappear overnight.
Guardian Assurance managing director Tom Jackson says there are some investors who like investments which are tax-paid and hassle-free when it comes to the end of the financial year.
Some investors who switch out of tax-paid products may find they will resume writing tax returns at the end of the financial year. Also there may be a requirement for the investor to pay provisional tax during the year.
Likewise Equity Research principal Phil Briggs warns against investors making wholesale switches out of tax-paid products.
He says people need to be cognisant of how such a switch will impact on their Community Services Card as the income they receive from their investments will be regarded as part of their total taxable income.
Eligibility for a card is related to taxable income levels and in some cases an investor may exceed these limits and lose their card.
Perhaps the most compelling reason for being cautious about switching out of tax paid products comes back to the track record of politicians.
Sure the surcharge has gone, but it is not forgotten.
The Todd Group is unequivocal in its view that there should be some form of means testing to integrate private and public provision - a surcharge but by a different name.
It wasn't the surcharge which investors despised, rather it was the fact that it had come to symbolise broken Government promises.
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