Cullen bows to tax break pressure in Kiwisaver plan [+ audio]

Michael Cullen is taking a 'suck it and see' approach to the tax change. Picture / Mark Mitchell

Finance Minister Michael Cullen has put aside his personal scepticism about tax breaks for savings and offered exactly that in the KiwiSaver scheme.

In a surprise move, Dr Cullen yesterday said voluntary employer contributions to a worker's KiwiSaver account will be exempt from the superannuation withholding tax they at present attract.

The total amount to be exempted will be capped, to reduce the chance of people taking excessive advantage of the arrangement.

The tax change was one of more than 20 alterations to the KiwiSaver scheme announced yesterday in an effort to boost New Zealand's poor savings record.

Among the other notable ones, savers will be able to divert half of their personal contribution to pay their mortgage, deductions will begin from a person's first pay day, and the overall scheme will be delayed for three months until July 1.

The changes were generally greeted positively, with much of the focus going on Dr Cullen's shift on tax breaks.

The Finance Minister has long been a sceptic about the impact of tax breaks for savings, and yesterday he admitted to adopting a "suck it and see" approach to the KiwiSaver move.

"Maybe it is time to try a limited level of tax support for savings to see if this will actually influence behaviour," Dr Cullen said. "Some of you will know I've long been sceptical around the impacts of that."

The tax break's cost is roughly estimated at $35 million in the 2007/08 fiscal year, increasing to $162 million in 2011/12.

Employers' contributions to their workers' savings accounts will remain voluntary. Despite this, there was concern in some quarters yesterday that increased pressure would go on to employers to pay up.

"Intuitively there will be pressure from employees and unions to provide employer contributions or salary sacrifice arrangements to benefit from these measures," said Deloitte managing tax partner Thomas Pippos.

"This will also lead to additional pressure on employers with existing superannuation schemes to convert these to KiwiSaver schemes."

In a hint that unions will indeed go down that track, Council of Trade Unions economist Peter Conway noted the tax change "shows that everything is being done to get employers to support workplace savings".

Business New Zealand chief executive Phil O'Reilly said he was worried the KiwiSaver changes could put "undue pressure" on employers to pay into employees' schemes.

Many of yesterday's KiwiSaver changes were a direct response to a select committee's recommendations - apart from the tax break and the mortgage diversion mechanism.

The mortgage scheme has been reinserted into the KiwiSaver bill at the request of United Future, despite it being removed several months ago amid concern from banks and after feedback from unions and retirement groups.

Dr Cullen said the decision to reintroduce the mortgage diversion option was finely balanced.

"The case was made quite strongly by United Future. We'll see how it plays out. I think it is worth a try."

Dr Cullen said the idea was that people paying a mortgage would remain engaged with KiwiSaver, rather than potentially deserting it.

But National's finance spokesman, John Key, likened the change to altering KiwiSaver from a savings account to a cheque account.

"This risks delivering accounts with low balances, insufficient for retirement planning - the very reason the minister rejected a 2 per cent contribution rate even though the net effect of mortgage diversion will mean that most accounts are saving just 2 per cent."

The bill passed its second reading in Parliament last night.


Kiwisaver changes

* Scheme will start on July 1 next year instead of April 1.

* Deductions will begin from an automatically enrolled person's first pay day, rather than after 11 weeks.

* Minimum contribution remains 4pc of gross wages or salary, but 2pc of this can now come from employer.

* Part of a person's own contribution can be diverted to pay their mortgage.

* The voluntary employer contributions will be exempt from specified superannuation contribution withholding tax. The exemption is capped to the lesser of the employee's contribution or 4pc of their salary or wages.