NZ tax laws too complicated, allow too much choice, policy group says

"New Zealand's tax laws are now too complicated and allow too much choice," Michael Littlewood, co-director of Auckland University's Retirement Policy and Research Centre (RPRC) said as he released briefing papers from the RPRC's recent tax symposium. Three briefing papers were released on Friday discussing superannuation schemes, tax and income, and will provide the basis for the RPRC's submission to the Government's tax review group. Links to the papers are below, we invite our readers to look through them along with us. "The tax laws and regulation that now govern pay and other income received through a "portfolio investment entity" (PIE) and a superannuation scheme are now complex and allow individuals too much discretion to change the incidence of tax. New Zealand used to have a relatively simple tax and saving environment but that has changed in the last ten years," Littlewood said. "To illustrate:"

Definitions of "˜superannuation scheme': There are now nine different regulatory definitions of a "superannuation scheme" though only three of those matter for tax purposes.

Definitions of "˜income': There are six different types of "income" that affect tax and welfare obligations.

Improving after-tax pay: With a co-operative employer, an employee on pre-tax pay of $150,000 a year can improve the annual value of after-tax remuneration by $6,125.

Improving after-tax investment income: A rich investor can reduce tax on an invested lump sum by nearly 30% without affecting spendable income. That same rich investor can also qualify for income-tested welfare payments.

"The RPRC welcomes the Tax Review Group's work and will make a submission highlighting the issues that seem to be of most significance as far as pay, saving and the interaction with the welfare system are concerned. The three PensionBriefings together show what happens when artificial boundaries are created between different types of income. We must expect taxpayers to take advantage of those boundaries," Littlewood said. "(O)ne clear result of this work is that richer, more highly paid individuals are best placed to maximise their after-tax incomes through use of the techniques illustrated in the PensionBriefings. That seems to strike at the heart of equity that should be an important component of New Zealand"Ÿs tax and welfare arrangements," he said. On its website, the RPRC stated:

For the 10 years up to 2000, New Zealand had a broad base, low-rate or comprehensive income tax system, supplemented by a broad-based GST. In this regime, there were some notable departures from neutrality, but saving specifically for retirement was not favoured for tax purposes over other forms of saving such as bank deposits. This approach was endorsed by the McLeod Committee in the 2001 Tax Review but many changes since then have undermined the principles and created new complexity, distortions and inequities. The welfare/tax interface has provided ongoing problems, made more complex by the transfer to the IRD of many specific welfare measures.

The symposium was titled 'Superannuation schemes, tax and income "“ have we lost our way?' It was held at the University of Auckland's Business School on July 16. Here are links to the three briefings. We invite our readers to read them with us and post your thoughts and insights in the comment space below. 1. Superannuation schemes, tax and "income" 2. Structuring remuneration to maximise value through "˜salary sacrifice' 3. If I won $5 million: structuring investments to maximise after-tax income