No disincentive to save: Officials

Inland Revenue and Treasury officials have told the government that the current tax treatment of employee superannuation does not discourage savings.

In a joint paper to Cabinet earlier this year officials said that employees on lower incomes do not have to have their savings taxed at the flat 33% rate under the current law.

"Employees can elect that contributions made on their behalf be treated as salary or wages. This means that the contributions are subject to PAYE, and therefore taxed at the employee’s statutory marginal income tax rate," the paper says. "Almost none make this election."

Their reason for this reluctance is that if their superannuation is included in their PAYE they miss out on family support payments and other support mechanisms delivered through the tax system, says Inland Revenue general manger of policy Robin Oliver.

There are a considerable number of taxpayers who fall into this category, he says.

One of the policy issues within the government is whether, therefore, those on lower incomes who manage to save should still receive those family support benefits. This was one of the issues that the taxation on life TOLIS project foundered on during the last government.

Finance minister Michael Cullen wants to see the family support level remain the same for families that do manage to save, and this issue is subject to ongoing work within the department.

The same joint paper from officials points to other, non-tax related disincentives to save, as being of greater importance for employer based superannuation schemes.

Compliance and administrative costs for employers were among the main hurdles for workplace based savings.

Employers are also concerned that they may be held liable for savings advice given to employees.

There is also a demand factor: employees have tended to ask for benefits in cash rather than as part of a superannuation package.

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

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