Government still eyeing savings tax break, but complexities and poor IRD computer systems stand in the way

Government still eyeing savings tax break, but complexities and poor IRD computer systems stand in the way

By Alex Tarrant

The government is still considering a form of tax break for term deposits as it works through the complexities of an idea proposed by its Savings Working Group that would see the tax on interest earned indexed for inflation.

This would mean withholding tax on earnings from term deposits would be much lower because they would be discounted for inflation. For example, the current average 1 year term deposit rate for a bank was 5.1% (see interactive chart here) in June 2010 while the CPI inflation rate in the year to June 2011 was 5.3%, meaning term deposit income would be tax free at current inflation rates. New Zealand households and companies had NZ$102.1 billion in bank deposit accounts  at the end of June 2011 and they paid NZ$1.98 billion in tax on the interest received in the year to June 2010.

Although a decision one way or the other could be some time away, understands the government is still looking at the idea after indicating before this year's budget that it was too complex to be included in Budget 2011, given the workload following the Canterbury earthquakes.

And on top of the complexities, it is understood one of the biggest roadblocks to a timely implementation of such a policy, or in fact any new tax policy, is the dire state of the Inland Revenue Department's computer systems.

Years of underinvestment have meant the IRD's 1990s IT systems have been operating at capacity since the implementation of policies such as Working for Families and are in need of an investment in the order of hundreds of millions of dollars to handle further changes - something the government may have to seriously consider over coming budgets.


Earlier this year the Savings Working Group recommended the government look at ways to incentivise certain savings vehicles, due to high marginal tax rates for vehicles such as term deposits versus lower rates for housing investment, something that had contributed to what the Group said was over-investment of household savings in property.

The recommendation to index taxes on savings for inflation had been earlier raised by one of the Group's members, Andrew Coleman, on Coleman and the Savings Working Group argued that while inflation ate away at the nominal returns of an investment like a term deposit, the full nominal interest earned on that deposit was taxed, meaning the investor was effectively paying tax on income they did not earn in real terms. 

The Group argued only the real return from the deposit should be taxed.

Renewed hope

Before the Budget, Finance Mininster Bill English said the complexities involved with such a policy meant it had not been considered in Budget 2011. Likewise, Opposition finance spokesman David Cunliffe did not express an interest in such a policy either, saying it would benefit only those who could already afford to save.

Finance Minister Bill English on Saturday morning told media at the National Party's annual conference in Wellington that the government was still considering small changes to the tax system, mainly taxes on savings vehicles.

IRD systems in need of hundreds of millions - could be a problem for Labour's CGT understands one of the biggest obstacles to overcome in order for the savings tax break policy to be properly implemented would be the IRDs 1990s IT system which is at capacity due to policies such as Working for Families.

And if the policy were to be given the go ahead, without some serious investment in those IT systems, other policies and current programmes may have to be put on the backburner in order for IRD to be able to handle any changes.

See earlier piece: Alex Tarrant asks whether IRD could even implement changes if the govt embarked on widespread tax reform?

Upgrades in the order of hundreds of millions of dollars would be in order for the IRD to be able to handle more of a shake-up in New Zealand's tax system, something which could count against the Labour Party's policy to introduce a more comprehensive capital gains tax if it was in power after the November 26 general election.

The recommendation

Here's what the Savings Working Group recommended on the issue of inflation indexation of interest:

Recommends that at a minimum, interest income and expenses be indexed at a notified standard rate for tax purposes that reflects the rate of inflation (e.g., 2% per annum), and that asset cost bases for depreciation and, potentially, trading stock opening balances are also indexed.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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How difficult can this be! Already, banks issue RWT statement to each depositor ,each year. Just have the IRD provide a rebate rate, based on the CPI each year, that the gross $ amount of interest is calculated at. ie: Anyone paid interest in any given year gets the CPI rebated used.So if they have short term deposits yielding a $ amount that equates to less than 5.3% p.a. ( the CPI example above) they get their interest rebate calculatd to an effective zero% and all their RWT back. If they have deposits maturing that have higher % rates,giving a a higher $ amount in any given year ( past investmensts at 5.3% to 6%,8% or higher) then they are effecively taxed on that amount over 5.3%. It's not a perfect answer, but better than no provision at all.

What a joke...Cullen's WFF chokes up IRD's systems leading to hundreds of millions needed for new computer capacity and ipads for all staff of course...which means the govt has to continue stealing tax from savers on interest earned on money that is debased each year as part of govt policy, otherwise they can't afford to make good the mess Cullen caused...

Here's an idea...why not end the WFF Labour pork slicing the crap from the IRD system and make space for the changes that would encourage saving and end the scam.

"Oh no no no we can't do would require a whole new IRD computer system just to terminate WFF.

Bloody madness.

Wolly, if savings is the magic bullet to every ecomonic ill and vice out there, why has Japan been so much in the economic poo yet it has one of the highest savings rates in the world????

PS what about the Govt "stealing"from workers. At least they get off their arse and actually produce something rather than sitting at home working out whether the Bank has miscaluated their compounding interest by a cent!!!!!

Were it not for the saving ethic of the Japanese, their economy would have collapsed in the 90s. It is only because they carried no debts when the brown stuff splattered up their property bubble wall, that they have been able to stagger along for two decades. That safety net is being removed right now and they will slide into the hole because they will need to refinance the debts on the world market....

As for the stealing by happens because govts cannot resist spending...even National are wasting finance in the midst of this shite. Just ask Shipley why she deserves a fatter handout from Gerry!  Ask the Nats who were either bailed out of Hubbards hole or who made millions shorting it.

My criticism of the govt policy to allow inflation of 3 to 5% is perfectly valid. Debasing the currency to wash away debts is thieving. English know bloodywell that is the case.


I know you are compelled to blame everything including the latest cold snap and probably the canterbury earthquakes on Cullen but can't you even identify what to blame him for properly?  It is the decision not to spend money upgrading the computer system.  The computer system is not up to it whether there is working for families or not.  

Anyway it needs upgrading for the capital gains tax :-)

Blame Cullen...quite right and he deserves it too....what is it with your goofy's over...move on !

Yeah take money from the lower income people who are working and have families and redistribute it to people who have savings.  What other great ideas can we come up with, take money from the unemployed and unemployable and give it to businesses who make massive profits while paying the minimum wage, or worse below the minimum wage by outsourcing to overseas sweatshops.

Colour me gobsmacked if anything ever comes of this - this govt has not the slightest desire to help savers and is using the same tactics of financial repression that other governments are using around the world.

Great lets index the taxes on wages to inflation, if you dont get a pay increase in line with inflation you get a tax break.

How are we supposed to subsidise savers?  Another increase in GST which hurts those that can't afford to save the most? 

Govt and central bankers created inflation, to tax the lower classes, now they want to protect the wealthy from paying this tax, and heap more of the burden on those who can least afford it.

Spin this whatever way you want, its another wealth transfer, and with wealth comes more power.

Also, the IRD is at loggerheads with Treasury over a CGT, as IRD knows that would be yet another major problem to try to deal with.  




"How are we supposed to subsidise savers?"

The answer is in the reccomendation above  "at a minimum, interest income and expenses be indexed at a notified standard rate for tax purposes that reflects the rate of inflation" 

So, if you are claiming interest expenses as a cost of business, you would only be able to claim the costs above the inflation rate. e.g. loan outstanding $100,000, interest $7,000, inflation 4% ($4,000) Expenses claim for tax purposes $3000.

The Reserve bank shows a total of $119.5 billion loans outstanding to business and agriculture plus a likely (guesstimate) 30% of the household sector debt ($184.1 B) being business loans in reality (small business & rental property) gives a total of $174,700,000,000 and an annual interest cost of around $12billion @ 7%. In the situation above, they would only be able to claim interest expenses of $5.22B

Savers? The reserve bank also provides totals of bank deposits, currently total household deposits are $100B and the likely interest paid to domestic savers a mere $5billion. In the inflation example They would pay tax on an inflation (4%) adjusted income of only $1B

Now I know this isn't a complete picture because of corporate bonds/cash held and non bank lending but these shouldn't change the picture significantly. The Government would be in a positive fiscal position if this programme was implemented.