Salary sacrifice crackdown looming

The government is about to crackdown on "salary sacrifice" superannuation packages being used to avoid tax.

Thursday, January 12th 2006, 6:49AM

by Rob Hosking

There has been growing disquiet amongst tax officials at the growing use of such packages, and the concern is behind the review of the Specified Superannuation Contributions Withholding Tax (SSCWT)

Treasury’s Half Yearly Economic and Fiscal Update says there is a review of the SSCWT "with a view to simplifying the provisions and investigating possible equity issues arising from the current provisions."

A discussion document is due out early this year.

The SSCWT was changed in 2002 to align it more with individual taxpayer’s actual rate.

Previously it was set at a flat 33%: the changes allowed taxpayers to opt to be included in the lower bracket as well.

However a deliberate decision was taken not to impose the tax at the top 39% rate, in a bid to encourage people to save more.

People can opt for this if they like – the payoff is they pay no fund withdrawal tax if they pull the money out earlier.

Those who opt for the lower rate do pay some fund withdrawal tax. Even with those in place there still appears to be a sizable number of taxpayers gradually lowering their tax by putting more of their pay into such schemes.

It turns out rather more saving has been going on under this than the Government would like.

The Inland Revenue Department’s briefing papers to incoming minister Peter Dunne raised concerns about the level of "salary sacrifice" going on.

"Although there is no hard evidence yet of significant increases in salary sacrifice, there is strong anecdotal evidence that schemes using SSCWT to lower tax payments aggressively are on the rise."

Any changes to the regime will have to be implemented this year as the government wants to have them ready when the workplace savings scheme, KiwiSaver, comes into force in April 2007.

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

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