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Inland Revenue

Tax Policy

PUBLISHED 19 April 2006

'Salary sacrifice' changes in bill

Legislation to minimise the use of excessive 'salary sacrifice' as a means of paying less tax will be included in the taxation bill planned for introduction in May, the government announced today. For more information see the government's media statement.

Hon Dr Michael Cullen
Minister of Finance

Hon Peter Dunne
Minister of Revenue


New legislation to target excessive salary sacrifice

The government will introduce legislation to minimise the use of excessive 'salary sacrifice' as a means of paying less tax, Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced today.

"In many cases, high-income employees 'sacrifice' their salary merely to reduce their income tax. They do this by arranging a dramatic reduction in their salary in return for a proportionate increase in employer superannuation contributions, which are taxed at a rate lower than their salary," the Ministers said.

"That is a misuse of the tax rules on employer superannuation contributions that results in great unfairness to other taxpayers on similar incomes. In the extreme, those who take advantage of salary sacrifice may well pay thousands of dollars less in tax than others on the same income.

"If the practice is not stopped, it has the potential to create a revenue loss of between $90 million and $120 million a year.

"The changes we are announcing today will mean that most employees are taxed at about the right marginal rate on their employer superannuation contributions. The top rate of tax on employer superannuation contributions will remain at 33 per cent, but employees on lower salaries will pay only 15 or 21 per cent, depending on their overall income.

"Rates will be based on the total of an employee's salary or wages and employer superannuation contributions, and the accompanying thresholds for tax on employer contributions will be adjusted. The adjustments will result in the thresholds being 15 per cent higher than personal income tax thresholds to reduce the possibility of over-taxation.

"The complexity of the legislation will be reduced by removing two of the options for assessing tax on employer superannuation contributions that are not being used.

"The changes, which were set out in an issues paper released earlier this year, will be included in the taxation bill scheduled for introduction in May," the Ministers said.

Chris Gillion (for Dr Cullen) 04 471 9926 or 021 227 4010
Ted Sheehan(for Mr Dunne) 04 470 6985 or 021 638 920