TEt offensive planned on private super

By BRIAN FALLOW economics editor

Finance Minister Michael Cullen has sketched some of the measures that could limit the cost of changes he favours to the tax treatment of private superannuation.

The present system, introduced in the late 1980s by Sir Roger Douglas, is called TTE (taxed-taxed-exempt). Contributions to a superannuation scheme are made from after-tax income; the interest that money earns while in the hands of a fund manager, including capital gains, is taxed; but when it is paid out to the saver it is tax-exempt.

Dr Cullen has long favoured an alternative approach, TEt (taxed-exempt-taxed). After-tax money would still go in, but the earnings of the fund would be exempt from tax, and on the way out the portion of the payout that represented capital contribution would be exempt, but the portion representing the fund earnings would be taxed.

Typically, about half of the payments from a superannuation fund are capital contributions and half earnings.

In a speech to Grey Power, Dr Cullen said TEt would only be an option; it would not replace TTE.

"People who wanted to stick with their existing arrangements would be entitled to do so."

A TEt regime was work-in-progress, rather than settled policy, he said.

One obstacle is officials' estimates (though Dr Cullen is said to be sceptical of them) that the TEt model will cut Government revenue by about $500 million a year early on.

In his Grey Power speech, he said the change was essentially a shift in when tax was collected, not how much.

Secondly, there was already some shifting of superannuation saving into foreign-based, tax exempt schemes.

"TEt is already a live option for many savers so it is not clear that a lot of new savings would go into the regime."

Dr Cullen said the options for containing the loss of revenue and limiting the amount of switching of savings from other vehicles were:

* Limiting the annual amount that could be placed in a TEt scheme and/or the amount which could accumulate there.

* Limiting it to contributions made "at source." This might help to rejuvenate employer-subsidised superannuation, and would ensure that only new savings went into tax-advantaged schemes.

* Limiting TEt to schemes that locked savings in, either for a minimum number of years or until some designated retirement age.

* Requiring schemes to limit the amount that could be withdrawn in a lump sum, to reinforce the regime's pension orientation.