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Laid-off workers look set to keep a bigger share of their redundancy cheques under proposed tax changes.
A spokesman for Finance Minister Michael Cullen said ministers have asked officials to report on the taxation of redundancy pay, which is treated the same as any other income in the
year it is received.
The effect of the current system is often to bump redundant workers up into the top tax bracket where they lose 39 per cent of their payout, even though their incomes both before and after that year might be lower.
Dr Cullen told workers at Pacific Steel last week that he would announce changes "in the near future".
"We will be introducing tax changes around redundancy pay to remove the possibility of over-taxation," he said.
Questioned later, he said: "Redundancy pay pushes people into a higher tax bracket."
The secretary of the Labour Party's union affiliates council, Paul Tolich, said the unions had been lobbying ministers about the issue for some time, but had not proposed a specific alternative.
"We are saying we need the question addressed. It's for them to come back with some proposal," he said.
National Distribution Union secretary Laila Harre, who was in the Labour-Alliance Cabinet from 1999 to 2002, said the Government dealt with the issue partially when insolvency laws were changed in 2004 to ensure that workers received up to $15,000 in unpaid pay, including redundancy pay, when a company went bankrupt.
"But it never satisfactorily addressed the issue of the taxation of redundancy payments," she said.
"The fact is that people are heavily penalised by the tax system for having put aside a part of their pay packet effectively over the preceding years into accumulated redundancy payments.
"In order to get redundancy payments [in collective agreements], we forego other things, so it's really anticipated income."
She said redundancy pay was taxed at a special rate of 5 per cent until the 1980s, but that "would distort negotiations and be problematic".
Instead, she said payouts should be treated as income spread over the whole period that someone had worked for the company, and taxed at the appropriate tax rate for each year.
Mr Tolich said redundancy pay usually ranged from four weeks' pay for the first year of service plus two weeks' pay for every subsequent year (4 plus 2) up to 6 plus 2, 6 plus 3 or 8 plus 2.
A worker on the current average wage of $45,147 a year would get a redundancy package after 20 years of service of $36,465 under a 4 plus 2 agreement.
Under current tax law, this could be enough to bump the worker's pay for that year above the $60,000 threshold for the top tax rate of 39 per cent.
Spreading the payout over the previous 20 years at $1823 a year would reduce the tax rate at least to the worker's current marginal tax rate of 33 per cent.
If the worker had earned the average wage in every one of those years, the tax rate would be reduced to 21 per cent for 14 of those years, when that was the marginal tax rate on the average wage.
The average wage rose above the $38,000 income threshold for the 33 per cent tax rate in 2002.