Spotlight on salary sacrifice for tax purposes

The government has started its crack down on "extreme" salary sacrifice by releasing an issues paper .

Wednesday, February 1st 2006, 2:09PM

As Good Returns has been reporting the government has had salary sacrifice in its sights, as it believes people are using it to get out of paying tax.

Revenue Minister Peter Dunne claims the “extreme salary sacrifice” being practiced by some people “merely to reduce income tax, is unfair and against the intent of the law, which is to ensure fair taxation.”

"In its post election briefing paper Inland Revenue drew attention to the growing misuse of the tax rules on employer contributions to superannuation funds on behalf of individual employees," Dunne says.

"That misuse can result in massive unfairness, with one taxpayer paying much less tax than another who has the same income.

"The tax rules on employer superannuation contributions are at fault. In some cases they allow the use of tax rates that are lower than those used for calculating employees' income. Therefore, to reduce the income tax they pay, some people are arranging with their employers to reduce their salary dramatically in return for increased employer superannuation contributions.

The issues paper released suggests changes to the rules to counter the practice of extreme salary sacrifice, including amending the progressive scale for calculating tax on contributions, and seeks feedback on the suggested changes.

Dunne says that he hopes to see the resulting changes included in the first taxation bill to be introduced this year.

The closing date for submissions is 15 March. The issues paper, "Countering extreme salary sacrifice", is available at www.taxpolicy.ird.govt.nz.

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