KEY POINTS:
New Zealand First leader Winston Peters' predicted savings incentive in this year's budget is expected to emerge in the form of tax-free employee contributions to the Kiwisaver scheme.
Tax experts are aghast that the Government may be fiddling with the fundamentals of Kiwisaver on the eve of its
launch on July 1, but they say the change they think is in the pipeline will make the scheme easier to understand.
Currently employees are told they can contribute 4 per cent or 8 per cent of their gross salary to Kiwisaver. The contributions would come out of tax-paid income even though they are set by reference to the before-tax income.
But there is an anomaly in the scheme because if an employer decides to contribute, the amount they put in is tax-free up to a maximum of 4 per cent of gross earnings. Beyond that the employer's contribution is taxed.
Tax partners said at the moment there is a tax advantage if, for example, an employee puts in 2 per cent of their earnings and talks their employer into putting in 2 per cent to get to the minimum 4 per cent. A person with that structure is better off than an employee contributing the 4 per cent amount being saved alone.
Aaron Quintel, tax principal at Ernst & Young, said the Government was probably considering making the employee contribution tax-free.
Paul Mersi, at PriceWaterhouseCoopers, agreed and said at the moment Kiwisaver was not well understood.
"Most people have heard of it and know if they enrol they'll get a thousand bucks from the government but they don't know much beyond that."
An announcement was made couple of months ago effectively making employers' contributions, which are voluntary, tax-free to a maximum equal to 4 per cent of gross income.
Mr Mersi said PriceWaterhouseCoopers had been fielding calls since NZ First leader Winston Peters made comments about the budget at the weekend.
On TVNZ's Agenda show, Mr Peters said he was still pushing for wider savings incentives and while the May 17 budget would not deliver all his dreams, it would be a start. "Some of the good news in the budget is that there will be a greater savings drive and incentivisation in this budget," Mr Peters said.
"He seems to be giving a reasonably clear hint that there is some kind of give away that you have to be an employee for and have to be a member of Kiwisaver for," Mr Mersi said.
"The thing that has formed in my mind is maybe what they are going to do is make the 4 per cent employee contribution tax-free.
"It would take away the confusion and it would allow the Government to sell another benefit of Kiwisaver," he said.
Tax experts said an issue with such a move is that it gives a tax advantage to one form of saving -- through Kiwisaver -- when other forms of saving come out of tax-paid income.
Jo Doolan, tax partner at Ernst and Young, said the move would have one advantage in that it was effectively a tax cut directed to a saving scheme and was therefore not going to stimulate the economy in the same way as an income tax cut. People would not have the money to spend.
Historically New Zealand government officials have not liked tax advantages for savings schemes.
Ms Doolan questions why the Government has to be the intermediary in the Kiwsaver scheme.
IRD collects the money and diverts it to the fund manager and there are default providers if one is not chosen.
Also the scheme does not address the issue that salaries are low in New Zealand, making saving difficult for some people.
No one really knows what the take up of Kiwisaver will be. Some tax partners suspect people will start the scheme to get the $1000 then take a holiday from savings after one year in the scheme, which is possible under the rules.
Ernst & Young said seminars they have had on the scheme for clients have been fully booked and they have had to hold extra sessions.
The New Zealand scheme is different to Australia. In Australia it is compulsory for all employers to contribute 9 per cent of a person's salary into a savings scheme. Most advertised salaries in Australia do not include the compulsory 9 per cent employer contribution.
Tax experts here point out the debate about employer or employee contributions is almost academic as an employer contribution is still part of an employee's total package and still arguably the employee's money.
- NZPA
