1. Improving the SSCWT rules
Summary of suggested changes 1.1 Employees can arrange their remuneration so that it is taxed at lower rates by "sacrificing salary" in return for increased employer superannuation contributions. Employer superannuation contributions are taxed through Specified Superannuation Contribution Withholding Tax (SSCWT). 1.2 In some circumstances, the SSCWT rules can allow the use of tax rates that are lower than the rates used in the calculation of an employee's income tax. By arranging to receive much less remuneration as salary or wages, but much more remuneration as employer superannuation contributions, employees can gain access to these lower rates, thereby decreasing their overall tax liability. In some cases, people earning comparatively high levels of income can reduce their tax so that they are paying significantly less than other taxpayers who earn the same or less income. 1.3 Some degree of salary sacrifice can be part of usual employment arrangements, but sometimes it is used for the reason of reducing tax rather than for the purpose of saving. There are a number of tax schemes that use extreme salary sacrifice to minimise the amount of tax that participants pay, behaviour that can undermine the fairness of the tax system. Moreover, there are costs to the economy when taxation rules encourage people to rearrange their affairs for no benefit besides reducing tax. The rules for calculating SSCWT could be changed so that opportunities to engage in extreme salary sacrifice for no reason other than reducing tax liabilities are reduced. 1.4 In addition, the rules for calculating SSCWT have become more complex over time. New rules have been introduced to meet specific needs, which has resulted in four options for calculating tax on employer superannuation contributions, not all of which are being used. The SSCWT rules could be simplified by removing those unused options. 1.5 This issues paper, which has been prepared by officials from the Policy Advice Division of Inland Revenue and from the Treasury, describes the operation of the SSCWT rules, and suggests ways of countering extreme salary sacrifice. It also suggests reducing the complexity of the rules by reducing the number of ways that SSCWT can be calculated. 1.6 The paper seeks views on the suggested changes before we make recommendations to the government, which has indicated that it would like to see legislative changes included in a taxation bill to be introduced in the first half of 2006. 1.7 The changes suggested in this paper would improve fairness by reducing the opportunity to minimise tax through salary sacrifice, and make the rules simpler by reducing the number of methods for calculating tax on employer superannuation contributions.
1.8 The suggested changes would apply from 1 April 2007. 1.9 We would appreciate receiving any comments on the suggested changes by 15 March 2006. 1.10 Submissions should be sent to:
SSCWT and salary sacrifice project 1.11 Alternatively, submissions can be made in electronic from, in which case "SSCWT and salary sacrifice project" should appear in the subject line. The electronic address is:
policy.webmaster@ird.govt.nz 1.12 Please note that submissions may be the subject of a request under New Zealand's Official Information Act 1982. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. If there is any part of your submissions that you consider could properly be withheld under that Act (for example, for reasons of privacy), please indicate this clearly in your submission.
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