Move to close loophole on superannuation payments

A $160 million leap in the tax take on superannuation contributions has led the Government to look at closing a potential income tax loophole the rich could be exploiting.

Inland Revenue suspects that some wealthy individuals or families are taking advantage of the fact that an employer's superannuation contribution is taxed less than income.

IRD yesterday issued a discussion document Countering Extreme Salary Sacrifice showing how the loophole works and potential ways to close it.

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 so-called salary sacrifice would only be practical if the individual had other sources of income or if they were in a two-income household, said officials.

It was also possible that some employees who earn salaries or wages but also received bonus payments could be asking for the bonus payments to be paid as employer superannuation contributions.

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.

Officials said they had only anecdotal evidence of the extent of the rort, but 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.

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

Officials said the increase was not necessarily an indication of the size of the tax rort as it could be due to other factors such as people genuinely saving more money.

But they noted that in previous years the tax take from employer superannuation contributions had been relatively stable.

The problem was first flagged to the Government in the incoming briefing to the new Revenue Minister Peter Dunne.

Yesterday Mr Dunne said the misuse could result in "massive unfairness" with one taxpayer paying much less tax than another.

"While we want to encourage people to save for retirement, extreme salary sacrifice of this kind, merely to reduce income tax, is unfair and against the intent of the law, which is to ensure fair taxation," Mr Dunne said.

The closing date for submissions on the discussion document is March 15.

Mr Dunne said he hoped to see the loophole closed in the first taxation bill of the year.

- NZPA