Super for some

Who says there wasn't any good news in Michael Cullen's Budget last week? There was even a tax cut - but only if you can answer "yes" to the following questions:

* Do you earn less than $38,000 a year?

* Does your employer offer a staff superannuation scheme?

* Is the boss an obliging sort, happy to do a bit more work to keep the staff happy?

If you can tick all of the above, then there was a little extra in the Budget, or at least the promise of a little extra from April 1 next year.

What Cullen announced was a plan to change the way in which some super schemes are taxed, allowing lower-paid workers' savings to grow faster.

The change will apply to work-based super schemes, where an employer helps workers save by contributing, for example, a dollar for every dollar the employee puts in.

At the moment, employers' contributions to such schemes are taxed to the tune of 33 per cent.

So, when your employer promises to match your super contributions dollar-for-dollar, what it actually means is that for every dollar you put in, you get an extra 67c from the company - and the other 33c goes to the taxman.

Cullen's plan is based on the argument that this is unfair to employees who earn less than $38,000. If they receive money directly from their employer, as pay, it gets taxed at their marginal tax rate - 21 per cent - but the money they receive in the form of super contributions gets taxed at 33 per cent.

What the Government plans is a law change which will allow employers to apply a tax rate of 21 per cent to super contributions made on behalf of workers on less than $38,000.

For lower-paid workers, that will mean that every dollar the employer contributes will add 79c to their super savings, rather than the present 67c.

None of the above applies to private superannuation plans, which will continue to be taxed the way they are now.

For members of work-based schemes, the planned change may not be on a par with winning Lotto, but over time it could make a worthwhile difference to the amount saved. For example, if you're putting $50 a week into a super scheme and the boss is matching that, after a year you'll have accumulated $4654 under the planned system, rather than $4342 under the present tax regime (ignoring any earnings the fund might make over the year).

Cullen has said that the present system over-taxes lower-paid workers' super contributions by some $29 million a year.

For people who can take advantage of the planned change, it will effectively be money for nothing - they will be saving more without having to put in any more money than they do now.

But it has its limitations. For one thing, the vast majority of workers don't belong to employer-subsidised super schemes. Work-based superannuation has been in a steady decline and, according to figures from the Government Actuary, fewer than one in eight workers in the private sector is putting money into such a scheme.

As well, workers will be able to take advantage of the Government's generosity only if their employer is prepared to do the extra work needed to decide whose contributions get taxed at the 33 per cent rate and who qualifies for the 21 per cent discount.

That's because the change will be optional, to avoid loading employers with another administrative burden which might encourage them to give up on super altogether.

How likely employers are to oblige should become clearer once the details of the planned change are revealed.

Whether the change is "fair" is also debatable. While it will mean less tax for lower-paid workers, they still won't be as well off as those on the top tax rate, earning more than $60,000 a year. People in that category actually get a slight incentive to put money into super schemes, because their employer's contributions are taxed at 33 per cent, rather than the 39 per cent that would apply if they received the money directly, as pay.

You could even argue that the 33 per cent tax rate isn't as unfair as it seems on lower-paid workers. After all, if they got the money directly, as pay, not only would it be taxed but it could also reduce entitlements such as Family Support.

Nor does the planned change deal with a much bigger issue - the way super funds' earnings are taxed. At present, any profits a fund makes on its investments are taxed at 33 per cent, despite the fact that many members would pay a lower tax rate if they invested their savings directly, rather than via a super fund.

Some of those issues may be addressed this year at a forum Cullen has said he wants to hold to try to revitalise employer-based schemes.

While the proposed tax change has been welcomed by people involved with superannuation, no one is predicting a rush by would-be savers eager to take advantage of the Government's largesse.

The change is a move in the right direction, says Vance Arknistall, chief executive of the Investment Savings and Insurance Association, which represents life insurance and investment companies, "but by itself it will do little - it will benefit existing savers who are members of an employer superannuation scheme, but it's unlikely to encourage any massive move to saving and certainly won't change the savings levels, in our view".

At this stage, it's hard to know how many employers will offer the cheaper tax rate, but "we hope employers will see this as a benefit to their low-income people and bite the bullet and put it in place".

Greg Lee, an actuary with Aon Consulting, which advises many workplace schemes, says the change is "the most positive news we've had out of government in 13 years or so". But, while it's better than nothing, "it's probably a case of too little, too late".

"What he's done is brought the withholding tax down to the person's marginal tax rate, which is great, so the so-called disincentive is removed, but it's not going to provide a great incentive for people to join a scheme."

And Lee says the change will probably add more cost for companies, giving them another reason to get out of super.

Susan St John, a senior lecturer in the economics department at Auckland University, also worries that any added complexity may mean the change is "just another nail in the coffin" for work-based savings.

At the Association of Superannuation Funds (ASFONZ), whose members include many work-based super schemes, executive director Bruce Kerr says that while the change will help people earning under $38,000, "I don't think it's sufficient stimulation on its own to necessarily encourage more people to join".

While it's up to employers to decide, Kerr says the demand from lower-paid workers should be enough to encourage many companies to offer the lower tax rate, and payroll systems should be able to handle the change without overburdening employers.

But while the change may be welcome, a much bigger issue remains.

"ASFONZ suggests the existing regime of tax neutrality for the past 13 years hasn't necessarily delivered the results the Government was looking for, which is an increase in the number of schemes and people saving for their long-term retirement.

"It may be time for the Government to sit back and reflect on the way forward, which may be for them to think through issues of deferred tax, or incentives if that's the word you want to use, and look at the very thorny issue of the taxation of earnings."

* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. mark_fryer@nzherald.co.nz. Ph: (09) 373-6400, ext 8833. Fax: (09) 373-6423.