Cullen to level tax playing field

Finance minister Michael Cullen outlines plans to tax all investments equally.

Friday, February 22nd 2002, 11:37AM

The other promise we made on super was to guarantee superannuation into the future by putting aside contributions now to smooth the costs of an ageing population. The New Zealand Superannuation Act was passed last year and the government has been making payments of $23 million a fortnight into the scheme.

The money is now sitting in a special account in the Debt Management Office of the Treasury until the governance and administrative arrangements for the fund are established.

This will be done by the board of guardians. The Act provides for a board of five to seven members, and gives the board responsibility for setting the investment policies of the fund and for appointing the funds managers.

It requires the board to follow best practice portfolio management, maximise returns without undue risk to the fund as a whole, and avoid prejudice to New Zealand's reputation as a responsible member of the world community.

To protect the board - and the fund - from political meddling, the legislation stipulates that the government must make the appointments from a short list prepared by a special nominating committee.

The committee advertised for nominations last year and received over a hundred expressions of interest. It is now sorting through the candidates and hopes to be able to present the list to the government by early next month.

I would expect to be able to make the appointments before the end of that month, and would hope that the fund was up and operational by around mid year.

The New Zealand Superannuation Fund represents one of the most significant political initiatives in decades. It is often mistakenly presented as a policy of special interest to the currently retired but the real beneficiaries are not today's superannuitants but the superannuitants of the future - the people who are in their mid fifties now, and younger.

Although the previous government cut super in the late 1990s in response to the Asian crisis, almost all commentators, including National, accept that it will not come under serious cost pressure until the baby boomers - those born between 1946 and 1965 - begin to retire.

That is why National is prepared to guarantee superannuation at current entitlements to people who are now in or near retirement. They cannot with any degree of good faith or credibility extend the guarantee beyond that because they are not prepared to support the government's partial prefunding scheme and therefore have no funding mechanism.

However - at least at this stage - they are refusing to state where their cut off point would be and what people would miss out. What will they define as "near" retirement - 55, 50? And remember for the purposes of this discussion that a National government would probably comprise Act and that Act is on record as supporting a raise in the qualifying age for super from 65 to 68.

Until National is prepared to come clean on this issue, we cannot have a meaningful or honest debate on super in this country.

But we are aware that we also have to compete on tax as other jurisdictions are using tax rates as a source of competitive advantage. The Tax Review made a number of recommendations on international tax and in the tax treatment of entities which I have incorporated into the government's work programme.

Given the fiscal pressures facing the Government, I will be looking for changes that involve the highest economic payoff for the lowest fiscal cost.

In the outbound investment area, the Review captured the conundrum perfectly.

I quote:

"On the one hand, New Zealand does not want to induce our most mobile taxpayers to consider moving from New Zealand. On the other hand, New Zealand does not wish to adopt a built in tax incentive that causes people who remain in New Zealand to see a tax advantage in investing off shore rather than in New Zealand."

"But it is precisely this type of system that produces a tax incentive to invest off shore that is the international standard."

The Review's preferred solution is that investment in listed shares and securities be taxed at a standard risk-free rate of return, no matter the country of investment.

I am interested in this idea because it has the potential to make the relevant tax rules simpler, fairer and more effective. I hope to be in a position to set out in some detail the likely direction the government will take on these issues in the upcoming budget.

This is an extract from a speech that Michael Cullen, Minister of Finance, gave to the Ladies' Probus Club in Auckland on February 22.

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