Tax: What does Dr Cullen have in store for us?
Deloitte Touche Tohmatsu tax partner Greg Haddon outlines how tax changes will impact on investments.
Friday, February 4th 2000, 12:00AM
We are now well into the new millennium, and given that no Y2K disasters have occurred, I have taken some time to take a glance at my crystal ball for what the future might hold for the investment industry in the year ahead. What changes will Dr Cullen bring about and what impact will these have on the industry and investors?
We have already had the changes to the tax rates announced along with the rates of FBT, which I note has officials scrambling to resolve the fact that many benefits are provided to employees that are not on high salaries receiving the use of a BMW 7 series, but are middle income earners with the use of a Toyota corolla.
The increase in the top tax rate has resulted in many high income earners seeking to structure their affairs to limit their exposure to the additional 6%. One commonly quoted method is to have a certain level of your earnings paid into a superannuation fund. Clearly this would be advantageous to the superannuation fund managers, however Cullen has indicated that he is not so keen on the leakage that could result.
Cullen however faces a dilemma, does he increase the cost of contributing to a superannuation fund which has the impact of further disadvantaging an industry which is suffering from compliance costs and a low level of savings as it is, or does he accept a level of leakage to foster savings in New Zealand? At the end of the day, in two and a half years time he could be able to praise his policies for creating a greater level of savings. He does not need to explain that it is coming from the higher wage earners. However, the obvious risk with this strategy is that the additional money flowing into the superannuation industry is merely being moved from other investment avenues.
Cullen has also indicated a desire to review the tax status of superannuation funds. He has publicly suggested a review of the TTE (contributions Taxed, scheme income Taxed, withdrawal Exempt) regime applying to superannuation schemes and the tax liability of superannuation schemes arising on equity gains. One must also assume that the inequity of investors on the lower tax rates being taxed in the fund at 33% is also on the agenda (the problem the TOLIS proposal was attempting to remedy). Added to this is the proposal from the Alliance that superannuation funds should get tax breaks where they invest in higher risk seed money for New Zealand industry.
In relation to the increase in the tax rate, I think (hope) that Cullen will look to other means of tightening up on high income earners using superannaution funds as a means to avoid the 39% tax rate. He has the ability to strengthen the Superannuation Schemes Act to give the Government Actuary greater power to deregister a scheme where the investors are able to use the scheme as a bank account. He could for instance require that the funds be locked up for a certain period. Alternatively he could only recognise for tax purposes those schemes that have such a restriction. In my view it would be better to have the restrictions (if there are to be any) in the Superannuation Schemes Act, as having restrictions in more than one place just creates confusion.
In the long term the repeal of the TTE regime to say a EET (Contributions not Taxed, scheme is not Taxed, and withdrawals taxed) would resolve some of these issues. However this has a real tax base implication. Cullen would need to find sufficient revenues to fund the shortfall in revenue until the investor withdraws their investment. After all the creation of the TTE regime provided a lot of the tax revenues to allow the drop in the top individual tax rates in the mid eighties.
An EET regime would also eliminate the problem for investors on lower tax rates and may give a much needed incentive to save. However it will also create an incentive to invest in superannuation as opposed to other investment vehicles. When questioned on this impact prior to the election Dr Cullen stated that he had not considered the implications. Clearly he will need to consider the impact of any policy on other vehicles, and on direct investment, as to provide an incentive to one will create considerable realignment in the investment industry with disadvantages to many.
The investment industry is looking for a fair and consistent tax treatment where investors are not incentivised to invest in any one particular product. Dr Cullen has a decision to make as to how he can achieve this as well as consider ways that he can increase the level of savings.
Greg Haddon is a tax partner with Deloitte Touche Tohmatsu.
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