Company Tax Cut Would Boost Savings Proposals

15 September 2004

Company Tax Cut Would Boost Savings Proposals

The thrust of the Government commissioned Harris report on Workplace Savings is being welcomed as a positive step in the right direction.

But Rozanna Wozniak, the Chief Economic Adviser to Spicers Wealth Management, says there several proposed features of the scheme could undermine the drive to encourage savings.

The terms of reference provided to the Harris working group stipulated that an employer contribution was not on the agenda. However, this constraint has led to scheme features that are likely to undermine membership rates and compromise the success of the scheme.

The absence of a minimum employer contribution runs the risk of a scheme with low participation rates and high costs. If employers were required to contribute, membership rates would increase, allowing fees to be minimized through economies of scale.”

“The Government could facilitate employer contributions by cutting the company income tax rate from 33 percent to 30 percent. This would provide over $500 million dollars to help employers to match the savings of their employees,” Rozanna Wozniak says

The Harris report proposes that all new employees from April 2006 will automatically see part of their pay go into the savings scheme unless they opt out after 30 days.

There will be an exemption for firms with five employees or less.

Funds will be locked in for the first five years then up to 50 per cent of the balance can be drawn out at three yearly intervals. The working group felt that with no subsidy such as an employer contribution, it would be morally problematic to restrict access by employees to their funds. Rozanna Wozniak sees that as a weakness. “The temptation to withdraw funds will be significant. We believe that an employer subsidy should be placed on the agenda and withdrawal restrictions should be tightened. The funds could be allowed to grow, providing a meaningful sum for retirement.”

Harris is proposing that 5 percent of earnings above $16,172 automatically be channelled into savings schemes by way of an adjustment to the tax code.

The Harris report envisages employers selecting a preferred fund manager from an approved list in the first instance with employees having the option to select their own at a later date.

Rozanna Wozniak says this still imposes a significant burden on employers, when the relationship should be between the employee and the fund manager.

“This will unnecessarily burden employers and put them in a position of moral responsibility for the performance of the fund manager. Employers need neither the extra work nor the implied obligation.”

ENDS

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