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Tax breaks for superannuation contributions

12 December 2006

Tax breaks for superannuation contributions

Jo Doolan
Tax Director, Ernst & Young

In the spirit of Christmas and goodwill to taxpayers the Government has moved to create a level playing field between Kiwi Saver and approved superannuation schemes.

While this has been expected the industry and employees will be relieved this has been confirmed rather than the subject of speculation, says Ernst & Young Tax Director Jo Doolan.

“With tax breaks already announced for contributions to Kiwi Saver schemes the fear was people would withdraw funds from their existing schemes to chase the tax breaks,” says Jo.

“History shows the money tends to get spent rather than reinvested and this factor together with the potential negative impact on the saving industry would have been detrimental to the savings culture the Government is desperately trying to encourage.

“After coming out and publicly bagging those who were exploiting the existing rules by getting into excessive salary sacrificing, without defining what this really meant, these changes provides certainty,” she says.

The tax free contribution will be the lesser of the employee’s contributions or 4% of the employee’s salary and wages.

In a case of read the fine print this means if an employee contributes 4% of their salary to an approved super fund then their employer can also contribute 4% without incurring a tax charge.

If the employee contributes 3% and the employer 4% then 1% of the employer’s contribution will be subject to tax.

Jo says that while on an individual basis the tax savings may not be great, the cost to the Government is estimated as $17 million in the first year of 2007/08 increasing to $19 million in 2009/10.

“These changes are welcomed but it is highly likely self-employed people will be banging the discrimination drum or throwing their toys out of the cot. They miss out unless they restructure their businesses to operate via a company and become employees.

“The other rain cloud that could also result from these proposals is unions demanding employers fund both superannuation savings and pay increases.”

Joanna Doolan is a Tax Director with Ernst & Young joanna.doolan@nz.ey.com contract phone number 093007075 or 0274935627

ENDS

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