Government targets super fund tax loophole

The Government is acting to close a loophole that allows some wealthy employees to dodge tax.

Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced today that measures to combat so called "salary sacrifice" would be included in a piece of taxation legislation to be introduced in May.

Inland Revenue (IRD) suspects that some wealthy individuals or families could be rorting the tax system by taking advantage of the fact that an employer's superannuation contribution is taxed less than income.

Currently an individual on $100,000 year would pay income tax of $30,270. If that employee arranged with his employer to cut their salary to $9500 and pay the balance as superannuation contributions after two years the tax liability would drop to $15,000 -- effectively halving the tax liability.

The ministers today said the practice could potentially cost the Government $90 million to $120 million a year.

The changes would mean employer superannuation contributions would be taxed at the same rate as the employees' personal marginal tax rate.

However, the top rate would remain at 33 per cent -- in line with investments in managed funds -- and the tax rate thresholds would be set 15 per cent higher than the personal tax thresholds.

This was so that individuals close to a threshold did not face a tax bill at the end of the year if their employer contribution pushed them into the next bracket.

"The changes we are announcing today will mean that most employees are taxed at about the right marginal rate on their employer superannuation contributions," the ministers said.

They also said some of the complexity of the current regime would be reduced by removing two of the options for assessing tax on employer contributions that were not being used.

The changes were first set out in a discussion paper released earlier this year.

In that paper IRD said it was also possible that some employees who earned salaries or wages but also received bonus payments were asking for the bonus payments to be paid as employer superannuation contributions.

Officials said it would not be practical to use the loophole without other sources of income because it is usually difficult to withdraw money from superannuation schemes for day-to-day living.

They said there had recently been a large leap in the tax take from employers' superannuation contributions.

In the year ending December 2004 this tax take was $502 million.

In 2005 the take had jumped to $662 million, a $160 million, or 32 per cent, increase.

- NZPA