Report pins tax inequity

If death and taxes are the only certainties, there's something almost as inevitable: complaints that those taxes aren't fair.

So it is with the latest report from the Periodic Report Group, the body advising the Government on New Zealanders' preparation for retirement.

The report makes it clear that the way investments are taxed has some way to go before it could be described as state of the art.

In tax heaven - if that idea isn't a contradiction in terms - taxes would be "neutral"; investors would decide where to put their money purely by looking for the best return, at an acceptable level of risk, without having to worry about how those returns would be taxed.

However that nirvana is a long way off, the report suggests.

It says the problems include:

* An "unclear boundary" between capital gains and ordinary income. So when an investor gives his or her money to a fund manager, who makes capital gains by actively trading investments, those gains will be taxed as though they are ordinary income. But if the investor buys shares or property directly, any gains are less likely to be taxed.

* Different tax rules for similar investments, depending on whether they are based in New Zealand or overseas. Generally, says the report, the tax system is kinder to New Zealand investments than those based overseas - with the exception of some tax-favoured investments in Australia and Britain.

* Unfair treatment of some savers in superannuation funds and life insurance companies. If you entrust your retirement savings to a super fund or life insurance company, any investment profits get taxed at 33 per cent, despite the fact that your tax rate may be 21, 33 or 39 per cent. That's a tax break for investors in the highest tax bracket but a penalty for those earning less.

* More unfairness, this time for some savers who use work-based super schemes. If your employer contributes on your behalf, those contributions get taxed at 33 per cent - a tax break if you're on the 39 per cent rate, but not for anyone else. The Government has recently moved to allow those contributions to be taxed at the individual's rate, though the report criticises it for making that option voluntary.

The Periodic Report Group, which doesn't support the idea of tax incentives to encourage retirement saving, says the Government should work on removing those less-than-neutral aspects of the tax system.

Considering the complexities involved, and the glacial pace at which tax reform typically moves, that should keep the experts busy for at least the next decade.