Tax cuts too shallow but change envisaged

Media Release
Friday May 23, 2008

Mercer: Tax cuts too shallow but change envisaged

Tax cuts for low and middle income New Zealanders delivered in yesterday’s budget are welcomed, but they have not gone far enough to assist working families who have waited nine years for tax cuts, according to consulting, outsourcing and investment firm, Mercer.

Mercer’s New Zealand business leader, Mr Bernie O’Brien, commented that whilst taking pressure off families battling rising inflation and petrol prices was a positive move, the tax cuts were disappointing from a KiwiSaver and investment tax perspective.

“We are still concerned that such changes will only increase operational pressure on employers, especially on smaller businesses, in terms of their payroll department managing two tax regimes that straddle a single tax year. This is on the back of significant pressures for many employers in the past few years that have had to work through the maze of Holidays Act and KiwiSaver changes required to their payroll systems."

“Our biggest concern is that the tax on investment earnings within KiwiSaver and many other investment vehicles taxed under a PIE regime has not changed. Treasury has made it clear that the status quo of PIE tax rates of 19.5 percent and 30 percent will not change at this stage,” he said.

Mr O’Brien said Mercer is encouraged by the fact that Treasury has signalled some changes once the savings industry in New Zealand has been consulted.

“Failing to make any changes now to this system also means that New Zealanders, particularly lower income earners, are essentially at a disadvantage when trying save for their future.

“The whole basis of the PIE tax regime was to ensure that lower income earners were being taxed on their investment earnings inside KiwiSaver, and other investments, at a rate that was consistent with their personal tax rate.

“Unless we have alignment in the PIE tax regime, lower income earners trying to save will be paying more tax inside KiwiSaver and other investments than if they did not save at all and took the money as cash – this goes against the premise of the PIE tax regime.

“Alignment of the tax rates is critical to supporting New Zealanders manage their finances and save for their future,” said Mr O’Brien.

Mercer is urging the Government to consider the introduction of a standard taxation rate on investment earnings within KiwiSaver and other PIE investments to make them more tax efficient savings vehicles.

Currently, all KiwiSaver schemes are or invest in PIEs, in which investment earnings are taxed at either 19.5 percent or 30 percent, depending on the saver’s tax rate. Under the changes announced in the budget many lower income earners will now have a personal tax rate below 19.5 percent.

“Standardising the tax rate at 17 percent - which is a weighted average of the new 12.5 percent and 21 percent tax rates post 1 April 2011- or lower will make KiwiSaver more attractive for people to join,” said Mr O’Brien.

“It would also encourage people to transfer savings from non-superannuation assets and traditional superannuation to KiwiSaver. This could have a profound effect on the savings habits of New Zealanders to use KiwiSaver as their primary retirement savings vehicle. Further, it will simplify the KiwiSaver tax and PIE tax within in it, whilst reducing the scheme’s costs as a whole.

“Standardising the tax rate would benefit investors, investment managers and scheme operators,” he said.

ENDS

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