Government to counter avoidance through super
27 March 2000
Government to counter avoidance through use of super schemes
The Government will introduce a special "fund withdrawal tax" to counter avoidance of the new 39 cent top tax rate by use of employer superannuation schemes, Revenue Minister Michael Cullen said today.
The superannuation fund withdrawal tax would be set at 5 percent of the amount withdrawn from an employer contribution scheme, unless the employee was leaving the job or withdrawing the money for reasons of hardship.
The tax would be limited to the percentage of the employer contribution withdrawn, and would not affect employer contributions made before 1 April this year.
"The measure is designed to prevent high-income earners avoiding the tax increase by arranging to have a portion of their salary substituted for employer contributions to superannuation funds which can be drawn on at any time," Dr Cullen said.
"Employer superannuation contributions, which are taxed at a flat rate of 33 percent, could be used by people earning more than $60,000 a year to plan around the new 39 cent rate. All they would have to do is negotiate an increase in their employer superannuation contributions, and then promptly withdraw those contributions.
"The Government has consulted widely with the superannuation fund industry and tax community to ensure the proposal is workable. I am confident it is, and that it will be an effective anti-avoidance measure, without adversely affecting employers, superannuation funds or people who are genuinely saving for retirement.
"We are also concerned about the long-standing problem of the 33 percent rate applying to the superannuation schemes of people who earn less than $38,000 a year and have a marginal tax rate of 15 or 21 percent. Their employer contributions are being over-taxed. For this reason we intend to investigate ways of lessening this effect," Dr Cullen said.
Legislation relating to the tax on superannuation fund withdrawals has been tabled today for first reading later this week. The bill also provides for the new three-tier system for the taxing of fringe benefits.
"All fringe benefits are now taxed at the top tax rate, whether or not the recipient is actually in the top tax bracket. This is unfair to low and middle income earners.
"The new FBT regime will remove that anomaly," Dr Cullen said.
Detailed information on the legislation can be found in the commentary on the Taxation (FBT, SSCWT & Remedial Matters) Bill. It is available on the web site of the Policy Advice Division of Inland Revenue at http://www.taxpolicy.ird.govt.nz.
Questions and answers - fund withdrawal tax
Question: What does the fund withdrawal tax achieve?
Answer: It prevents avoidance of the new 39 percent top personal tax rate by high-income earners without adversely affecting employers, employees and superannuation schemes. Further, it applies only to withdrawals from savings not meant for retirement. The measure will not affect people who are genuinely saving for retirement.
Question: What will be the impact on employees and employers?
Answer: Very little. Employees who continue to make contributions at their current rates will not be affected. After 1 April 2000 new employees will be subject to the fund withdrawal tax on contributions but it will be administered by superannuation schemes rather than employers, although employers will need to communicate the changes to employees. If by 1 April an employer is already committed to an increase in employee superannuation contribution, the tax will not apply to withdrawals of that increase.
Question: What will be the impact on superannuation schemes?
Answer: The new rules will be more complex than the current rules relating to the tax treatment of employer superannuation contributions. However, the impact has been minimised as much as possible, and alternatives would have had more significant effect, such as limiting how much employers could contribute towards their employees' superannuation.
Question: How will the fund withdrawal tax be implemented?
Answer: To minimise the impact on superannuation schemes the fund withdrawal tax will be implemented through the income tax system by applying income tax at the rate of 15.15 percent to withdrawals covered by the tax.