Business tax cut: the golden goose tarnishes

23 May 2007

Business tax cut: the golden goose tarnishes

"Post-budget, it's becoming clearer that for some businesses, the tax cut in last week's budget will be effectively wiped off the books, or at least substantially offset by the cost of KiwiSaver," say Ernst & Young budget spokespeople Jo Doolan and Aaron Quintal.

Ernst & Young is recommending businesses take steps to calculate the impact of employer contributions, and have their calculations checked, before entering wage negotiations.

Ernst & Young’s modelling of the proposals suggests some businesses may be in for a sharp surprise.

"The Government's prediction is that tax credits will account for half the cost of an average firm's wage bill, but talking about averages is false security," says Jo Doolan.

As a rule, the KiwiSaver employer tax credit will only fully fund the employer contribution if staff are paid no more than:

From 2008 1% employer contribution $104,000
From 2009 2% employer contribution $52,000
From 2010 3% employer contribution $34,667
From 2011 4% employer contribution $26,000

"Those who pay their employees more than a basic wage will end up bearing a substantial cost. An open book policy on figures - agreed in advance by both parties to wage negotiations - is going to be crucial.

"Business be warned. When compulsory super was introduced in Australia it was a result of an agreement with the Unions that this was instead of a round of wage increases. In New Zealand, the Government appears to be saying that this sort of compromise would be a good idea, but each business must negotiate.

"The great hope of the budget - that business would use the tax saving to invest in measures to increase productivity - is dimming by the day.

"Instead the hoax is giving a tax cut to business on one hand and telling them on the other that they have to pay into employee savings accounts."

Ernst & Young scenarios for two companies, Barely Surviving Limited and Boutique Architects, are available on www.ey.com/nz, under Budget 2007.

ENDS

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