Low income superannuation changes to cost $29 million per year

Reducing the unfair taxation on low income workers' retirement saving schemes will cost the Government about $29 million a year once it is up and running.

Finance Minister Michael Cullen will introduce new tax laws within the next few weeks to remove high tax rates on employment based superannuation schemes.

Under the current rules all employer contributions are taxed at 33 per cent no matter how much the employee earns. The effect is to overtax anyone on less than $38,000 a year.

The law change would reduce the tax rate to 21 cents.

The change is expected to cost the Government $7 million in foregone revenue in the first year and $29m thereafter.

Dr Cullen said in his budget speech there would be some more administration costs so the new rate would be optional for employers.

"But we hope there will be a strong pick-up rate because employment based super is one of the best ways of getting New Zealanders into long-term savings," Dr Cullen said.

The budget fineprint also shows that the Government is considering wider changes to taxation on savings.

In the unquantified fiscal risk chapter in budget documentation, Treasury said the Government was looking at whether the tax system was making it harder for people to save and whether the current tax regime was fair.

The cost of this to Government was impossible to work out because of the numerous options on the table and how they were implemented.

The New Zealand Superannuation Fund has also benefited due to the amount of cash available to the Government.

The fund set up to reduce the pressure on future governments when the baby boom generation begins retiring in 20 to 30 years was due to get $1.8 billion in the 2003 budget. Instead it will get $1.897b, the full contribution rate according to the complex formulae set down in the fund's legislation.

"This is the third year we have paying into the fund and we have been gradually building up the rate of payment over the time with a view to reaching the full rate in 2004-2005. The strong state of the Government's fiscal position has allowed us to bring that target forward by a year," Dr Cullen said.

- NZPA