Budget 07: Cullen's cashback for savers

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The biggest gainers in today's Budget are savers after Finance Minister Michael Cullen announced tax incentives for the Kiwisaver scheme.

The Government will give back up to $40 a week to workers in tax breaks, but the benefits for most will be even higher due to radical moves to force employers to contribute.

The Treasury also set out the benefits to members of the scheme. In one example, a 30-year-old couple earning the national combined average household income of $75,000 who both contribute 4 per cent of their salary would have total accumulated savings of $390,000 when they reitre at 65.

That would be enough to generate them extra income of $20,000 to $25,000 a year over and above the $22,164 they would receive as a couple from universal superannuation, according to the official estimates.

Under the changes workers who enrol in the scheme will get weekly tax credits equalling 4 per cent of their wages, capped at $20.

However, in a much bigger surprise Dr Cullen announced that employers would have to compulsorily match the minimum 4 per cent employee contribution.

The change would be phased in at 1 per cent a year over four years, starting from next year.

Employers would receive a tax credit of up to $20 to partially pay for the cost.

Dr Cullen estimated the change would impose about a 1 per cent rise in the cost of employers' payrolls by 2011-2012 if 50 per cent of workers had signed up to the scheme.

He said he expected complaints from employers, but the cost was far less than the 9 per cent contribution required in Australia.

Budget key points

:

* Regional fuel tax to pay for transport upgrades

* $600m over 6 years for urban rail

* Tax credits of up to $40 a week for Kiwisavers

* Business tax cut from 33 per cent to 30 per cent

* Extra funding for tertiary education

* Stricter auditing of property speculators

* $2m to prevent violence in Maori whanau and communities

He also expected compulsory employer contributions to savings would be taken into account during wage and salary bargaining.

National leader John Key said the Budget would do employers no favours.

'Hoax'

He said: "Perhaps the biggest hoax perpetrated in this Budget was on businesses, which on the one hand get tax cuts but on the other are forced to match their employees' Kiwisaver contribution in a cruel world.

"In fact, Aucklanders get a tax increase through regional petrol taxes. Adding insult to injury, Labour has also axed the paltry 'chewing gum' tax threshold changes due next year."

The Kiwisaver enhancements are in addition to the $1000 the Government is already offering for those that sign up, as well as first home buyer grants of up to $5000. Employer contributions of up to 4 per cent are tax free.

Under the scheme, which kicks off on July 1, participants can also divert half of all contributions to their mortgage.

Dr Cullen said bold action was required to reverse New Zealand's dismal savings record, which was one of the worst in the developed world.

Kiwisaver, which would cost $303 million in the coming year and $1.2 billion by 2010-2011, would benefit New Zealanders' retirement savings and the economy as a whole without fuelling inflation, he said.

"If we save more we spend less. That will mean less inflation and help to ease pressure on interest rates and the dollar," Dr Cullen said.

Dr Cullen said there was no guarantee the scheme would improve New Zealand's savings rate, but it was expected that in 10 years' time 40 per cent of New Zealanders aged 18-65 would belong to the scheme.

New First leader Winston Peters said: "The initiatives announced in this year's Budget represent a substantial leap forward.

"While New Zealand First believes that businesses could play a greater role in compulsory savings, today's announcements nonetheless represent good progress."

Charles Finny at the Wellington Regional Chamber of Commerce said while it supported KiwiSaver as a way of addressing relatively low personal savings, "compulsory employer contributions combined with partially offsetting tax credits will be a concern to many employers".

He added: " Not only will this penalise employers, it is an opaque and cumbersome money-go-round which will add to businesses' compliance costs. We would have preferred personal tax cuts so that people have the choice to put money into KiwiSaver."

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Kiwisaver examples

Meg and Jack are 30

They both earn $37,500 a year -- the national combined average household income of $75,000. They join Kiwisaver on July 1 and both contribute 4 per cent of their salary. Five years after joining they buy a house. They receive a $5000 grant each, which along with their Kiwisaver savings amount to $35,500.

When they retire at 65 they have total accumulated savings of $390,000 -- enough to generate them extra income of $20,000 to $25,000 a year over and above the $22,164 they will receive as a couple from universal superannuation.

Mike is 50

He is single and works full time earning the approximate average wage of about $45,000. Mike joins Kiwisaver on July 1 and contributes 8 per cent of his salary -- about $70 a week. He retires at 65 and has about $110,000 in accumulated savings -- enough to generate him an extra $8000 a year.

Aroha and Robert are 30

They both earn $22,500 a year -- a combined household salary of $45,000. They join Kiwisaver on July 1 and both contribute 4 per cent of their salary -- a combined figure of $35. When they retire at 65 they have accumulated savings of $300,000 -- enough to generate them an extra $15,000 to $20,000 a year.

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The scheme at a glance

* Employees who sign up must contribute either 4 percent, or 8 percent of their gross income.

* Participants will receive $1000 from the Government to kickstart their account and will receive a tax credit of 4 percent of their gross income, capped at $20 a week.

* Participants' savings schemes will claim the tax credit on their behalf.

* Starting from next year compulsory employer contributions will be phased in at 1 percent of an employees income, building up to 4 percent by 2011-2012. This contribution is tax free.

* Participants will be able to divert half of their and their employer's contributions to pay their mortgage.

* First home buyers can withdraw all of their savings to purchase their first home and after three years in the scheme will receive a deposit grant of $1000 a year, capped at $5000.

* The Government pays the administrative fees of Kiwisaver schemes.

- NZPA, NZHERALD STAFF