Between the lines - Cullen's super tax netting small fry

By BRIAN FALLOW

There must be some mistake.

Finance Minister Michael Cullen, who says he wants to encourage savings, has introduced a tax bill which could discourage it, at least for those who are not in the top tax bracket.

The bill introduces a "fund withdrawal tax" of 5 per cent on the employer contribution component of amounts withdrawn from superannuation schemes, except through hardship or leaving the job.

It is being promoted as a loophole-closing measure to prevent people from using superannuation schemes to avoid paying the new tax rate of 39c in the dollar on income above $60,000, which applies from next Saturday.

Employees earning over $60,000 could negotiate an increase in their employer's superannuation contributions, which are taxed at 33 per cent, with a corresponding reduction in salary subject to the 39 per cent tax rate.

Dr Cullen is prepared to wear that, provided the savings are genuine, that is locked into a registered super scheme. The 5 per cent tax is supposed to do the "locked in" part, and prevent schemes from being used as a cash account from which withdrawals can be made at will.

It does not apply to employer contributions made before April 1, 2000, or after it if the contribution does not increase as a percentage of salary.

The problem is that as the bill stands the withdrawal tax applies regardless of the marginal tax rate of the person doing the withdrawing. It does not just catch those on the new top rate.

So while it creates a tax incentive for people on the 39c rate to have such schemes as part of their remuneration package, it creates a disincentive for people on lower tax rates to do so.

For those on the 33c rate their employer's contributions are already being taxed at the right rate. Now they could face a tax penalty for early withdrawal.

True, many employer-subsidised schemes restrict access to funds except on retirement, cessation of employment, hardship or death. But not all do.

If employer contributions have been taxed at the employee's marginal rate, and he or she is free to draw on them, it is vexatious to impose an additional tax.

Dr Cullen says the Government is concerned about the longstanding problem of the 33 per cent rate applying to the superannuation schemes (employer-subsidised or not) of people who earn less than $38,000 and have a marginal tax rate of 21 per cent or 15 per cent.

He has said he favours changing the tax laws to allow new savings vehicles, where savings escape tax while in the hands of the fund manager but are taxed on the way out - the reverse of the present system.

That would be progress.

But in the meantime he is making the problem worse.