Details of special retirement tax plan

Press, 28 July 1989, Page 2

Details of special retirement tax plan

National Superannuation Last December the Minister of Social Welfare released a discussion document on the future of National Superannuation. The Government is now in a position to announce the major decisions on this matter. • The system should ensure that all New Zealanders have the certainty of an adequate retirement income. • The source of funding should be clear so that future costs are established and are seen to be clearly affordable. This suggests the costs should not be lost in the general taxation system. • Any changes which affect those presently retired or nearing retirement should be phased in very gradually. • The system should not act as a disincentive to savings. • Any changes should be robust enough to cope with the large increase in the number of elderly people which will begin to occur from early next century. The basis of the new system will be a universal Guaranteed Retirement Income. The cost of funding this Guaranteed Retirement Income will be marked off from the rest of taxation revenue by a special Retirement Tax which will replace part of the present income, company and related taxes. This tax will be set at 7.5 cents in the dollar. In other words, half of the tax paid at the lowest income tax rate will represent an earmarked contribution to the costs of retirement The rate for this tax will be projected forward for the next 30 years, but will be required to be confirmed each year by Parliament The tax will not be additional to present taxes but raather simply an earmarked portion of them. The purpose of this system is so that people can see how much the Guaranteed Retirement Income is costing and can have the certainty of knowing that it remains affordable into the future. The Retirement Tax and the new Guaranteed Retirement Income will commence on April 1, 1990. The rate for the Guaranteed Retirement Income will be equivalent to that for National Superannuation. In order to make the scheme more affordable in the long term, the rates will be brought slowly into line with those for other income tested benefits. This will not be done by reducing the actual payments. Instead, the Guaranteed Retirement Income will be increased each year by the lesser of the increase in the net average ordinary time weekly wage index or the consumers price index. This will enable a gradual reduction in the rate of payment relative to wages and other benefits as the economy grows without reducing the real standard of living of the elderly. The age of eligibility for the Guaranteed Retirement Income will initially be set at 60. There is no case for increasing that age in the short term because the number of elderly is not growing rapidly at the present time.

As a further move to ensure longterm sustainability, however, the age of eligibility will be lifted gradually between the years 2006 and 2025 from 60 to 65. This will coincide with the period of rapid growth in the number of elderly. The result of these changes is that it is anticipated that the level of the Retirement Tax will remain roughly constant for many years to come, varying between 7 and 7.5 cents in the dollar up to the year 2021. Finally, a change is being made to the National Superannuation Surcharge. From April 1, 1990, 50 per cent of the income from registered pension schemes and annuities paid by life offices will be exempt from the surcharge. That reflect the fact that roughly half the payment from a pention scheme represents the withf F

drawal of a contributor’s original capital. This change will make the surcharge consistent with the new taxation regime for superannuation. The result of these changes is to create a fairer but favourable regime for long-term savings. The surcharge will henceforth operate primarily as an income test only on those with significant income earning assets or those remaining in the full-time paid workforce. The certainty of the Guaranteed Retirement Income should address the concerns of those worried about its long-term future. It is now over to the superannuation industry to market its products effectively. Administrative Reform Tonight I am announcing the following further changes in the structure of Government administration: Two Government departments are to be abolished completely. The Government will shortly introduce legislation under which the Department of Lands will be merged with the Department of Survey and Land Information. And from. December 1, the Ministry of Energy, will be merged with the Ministry of Commerce. Both Lands and Energy remain important areas of Government interest, but in the Cabinet’s view no longer justify separate administration. The Government has also reviewed the area of occupational safety and health. It is agreed that in future one agency should be responsible for policy and delivery of occupational safety and health in all industries and activities and all types of employment Rather than establish a new agency the Government has decided that these responsibilities should be discharged by the Department of Labour. In addition the Government intends that in future there should be one act to' cover all work related hazards in place of the wide range of existing legislation covering different industries and activities. The Economic Development Commission is to be abolished. Tax Reform I am able to announce further progress towards the abolition of remaining anomalies and distortions in the tax system. Land Tax The Government has received a number of submissions on this subject Land Tax is one of the oldest forms of tax in New Zealand. It is the only Central Government annual tax on the stock of wealth. The present Land Tax Act was consolidated in 1976. The current threshold was last increased in 1977. The present rate of tax (2 cents in the dollar) was imposed in 1981. It is clear that the operation of the threshold in combination with the periodic review of land valuations causes the tax to operate in an arbitrary and haphazard manner. The rate of land tax payable on October 7,1989, will be reduced to 1.5 per cent This rate will be further reduced to 1 per cent in 1990. To ease the fiscal impact of these reductions land tax assessed on property held on March 31,1990 will be payable in two equal instalments, the first being due on May 7, 1990 and the second on October 7, 1989. In 1991 and in subsequent years land tax will be payable in full on May 7. In addition, specific exemptions from land tax have been reviewed. A number of these are no longer justified and will be removed in legislation I will introduce into the House shortly. Land used for fanning, forestry, residential, charitable and recreational purposes will continue to be exempt

As with a number of other tax reforms the result of these changes is a lower rate of tax, spread more evenly across taxpayers in similar circumstances. These changes will

yield additional revenue this year of $9O million and of $135 million in the 1990/91 financial year but a loss of revenue thereafter. The long-term future of land tax will be further considered in the context of the Government's review of the taxation of income earned as capital gains. It is still the Government’s intention to publish a discussion document on this topic later this year. Beverages This is another area of unnecessary complexity and controversy ... the basic case for heavier taxation on alcohol and on tobacco lies in the social costs of their consumption. In the case at least of alcohol this is somewhat arrbitrary, since everyone faces the higher taxes on alcohol but most drink only in moderation. Nevertheless the Government believes that the social harm that can be caused of excessive consumption of alcohol justifies the collectin of a separate tax related to the alcohol content of alcoholic beverages. As from tonight the excise duty on alcoholic beverages will be related directly to alcohol content, so that similar products with similar strengths of alcohol will be taxed to the same extent Only two rates of excise duty will apply: • On beer and wine, $l5 per litre of alcohol. • On spirits, $3O per litre of alcohol. At the same time the Government is anxious to provide the industry with greater certainty in relation to the future taxation of alcohol. Too often in the past taxes on alcohol and tobacco have been used at the last minute to accommodate the Government’s fiscal needs. This has made it difficult for these industries to forecast consumption and plan accordingly. It is therefore proposed that in future the rate of excise on beer and wine will be adjusted every six months in accordance with movements in the consumers price index. The first such adjustment will be made on December 1, this year. There will be no automatic adjustment to the excise duty on spirits in recognition of its already higher rate. These changes will increase the tax on a jug of beer by 10 cents, a threelitre cask of wine by 60 cents, and*a 750 ml bottle of gin or vodka by 60 cents as from Budget night They will

yield a total of $2O million in increased revenue this year ($l5 million from the change in rates structure and $5 million from indexation). Tobacco

The Government intends to adopt a similar approach to the taxation of tobacco as for alcohol. As the Sullivan Committee recommended, there will be a single rate of specific excise duty applying to all tobacbo products. The initial rate will be struck at $lOO per kilogram of tobacco.

This will result in an increase of 5 to 10 cents in the tax on a packet of 20 cigarettes. It is also proposed to introduce a similar automatic adjustment mechanism as for the taxation of beer and wine. As from September this year, and thereafter six monthly, excise duty on tobacco will be adjusted in accordance with movements in the consumer price index. As from tonight it is proposed to abolish the excise duty on cigarette papers. The total increased revenue from these changes is estimated to be $4O million this year ($25 million from the Budget night change and $l5 million from indexation). PAYE

It is proposed to reduce the period of time that currently exists between deductions of PAYE and withholding tax on supemnuation contributions by employers, and the date by which they must pay these over to the Inland Revenue Department. Currently, all deductions made within a calendar month must be paid to Inland Revenue by the twentieth of the following month. The average interval between deduction and payment is currently around five weeks. It is proposed to reduce this average interval to around two weeks. As from May next year employers will be required to make two payments of these two withholding taxes each month to the Inland Revenue Department

The first to be required by the twentieth of the month, will comprise all deductions made in the first half of the month (i.e. from the Ist to the 15th). The second, required by the sth of the following month, will comprise all deductions made from the sixteenth to the last day of the month.

It is estimated that although reducing the present cash flow advantage

to employers of the current five-week lag, there will still be a net benefit to employers from this system of tax collection, compared to their compliance costs. On the other hand the Government will benefit from earlier payment of the two taxes through reduced .debt servicing costs. It is estimated that in a full year the net fiscal saving will be approximately $4O million. A.C.C. levies The Accident Compensation Corporation has now stabilised its financial position. In real terms it has achieved the level of reserves which existed some years ago before the disastrous run down of its reserves in the early 1980 s. Accordingly, the Government has accepted the advice of the Board of the Accident Compensation Corporation that the average levy rate for the 1990/91 levy year should be reduced from $2.45 to $1.65 per $lOO of leviable earnings. This will give a considerable boost to employers in reducing their wage related costs, while preserving the corporation’s sound financial position. Fuels

On 21 March I announced in the Economic Statement the Government’s intention to progressively reduce the specific tax on automotive diesel. This is one of the few selective taxes still remaining on inputs to production. In light of the improving fiscal situation, the Government is pleased to be able to reduce the excise duty on diesel by a further 5 cents a litre as from 1 November 1989. Tax reviews

The Government has just received the final report of the Working Party on Charities and Sporting Bodies. The Working Party favours retention of the existing taxation regime, but proposes a strengthening of that regime to overcome both existing and potential abuses of tax-exempt status. The Government will consider this report sympathetically and will release the report together with our response in the near future. The Government is also examining the difficult area of the taxation of petroleum mining activity. It is intended to bring legislation before Parliament on this matter later this year.