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Spotlight on "salary sacrifice" for tax purposes

Wednesday, 1 February 2006

Spotlight on "salary sacrifice" for tax purposes

Revenue Minister Peter Dunne has welcomed the publication today of an issues paper on the use of "salary sacrifice" by some employees to lower the amount of income tax they pay.

"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," Mr Dunne said. "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.

"While we want to encourage people to save for retirement, extreme salary sacrifice of this kind, merely to reduce income tax, is unfair and against the intent of the law, which is to ensure fair taxation.

"The issues paper released today 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.

"The paper is the first step in the process of making a legislative change. Based on the feedback they receive, officials will make recommendations to the government, and I hope to see the resulting changes included in the first taxation bill to be introduced this year," Mr Dunne said.

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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