The New Zealand Government will forgo about $500 million a year in revenue if it chooses to provide tax incentives for private savings.
Finance minister Michael Cullen told the International Fiscal Association conference in Christchurch last week that he is keen to move to a taxed-exempt-taxed (TET) model for retirement savings.
“My preference at this point is to move from taxed-taxed-exempt (TTE) to taxed-exempt-taxed for the taxation of superannuation savings,” he says.
For the first time he has put a price tag on this move.
“Adopting the TET model would defer receipt of something like $500 million a year initially according to official estimates.”
Commentators say it is clear the Dr Cullen is working on the change as he can now provide numbers on its impact.
Cullen argues that the TET model reduces the effect of tax the longer savings remain in the fund, as savings accumulate free of tax.
“This would definitely benefit long-term savers, depending on the level of taxation imposed upon withdrawals.
“In moving to such a system, however, we would have to consider the likely fiscal implication, in that the revenue we are currently receiving by taxing this investment income as it is earned by the fund would be deferred until the funds are withdrawn years later.”
Dr Cullen acknowledges there are arguments for and against changing the present system, and he is keen to encourage debate.
“My view is that the tax system could do a lot more to encourage people to save for retirement, and this year I intend to foster an informed policy debate on the matter.”
Investment Savings and Insurance Association chief executive Vance Arkinstall says it is difficult for the industry to take a position on TET as the Government has announced no details on the concept.
Broadly though it supports the TET model.
He says the idea of having a TET regime where the final T is small would be “excellent”.
The ISI is preparing a submission for the Government’s tax review and is pushing the position that at the least the tax environment for savings should be neutral.
PricewaterhouseCoopers tax partner Paul Mersi says TET is a potential solution to some of the disincentives savers currently face.
