Tax deduction mechanism

Submission

(54 – Business New Zealand)

A tax deduction mechanism should replace the tax credit mechanism as the mechanism for delivering payroll-giving tax relief.

Comment

Two options were put forward in the October 2007 discussion document, Payroll giving: providing a real-time benefit for charitable giving – the tax deduction mechanism and the tax credit mechanism.

Under the tax deduction mechanism, donations would be deducted from an employee’s gross pay. This would reduce the employee’s taxable income and, as a result, alter the employee’s social policy entitlements and obligations. PAYE would be imposed on the net amount. An immediate tax benefit would be received by way of a reduction in the amount of the PAYE required to be withheld. The tax benefit would be at the employee’s marginal tax rate.

Under the tax credit mechanism, employees would receive a tax credit on the amount of their donations made each payday. Employers would offset the credit against the PAYE calculated on the employee’s gross pay, and the tax credit would be calculated on a set rate of 33⅓ percent.

The tax credit mechanism was preferred over the tax deduction mechanism as being more equitable because all employees would receive the same tax benefit regardless of their marginal tax rate. Furthermore, the tax credit mechanism does not alter the level of an employee’s taxable income, and therefore does not affect the employee’s social policy entitlements and obligations that use taxation income as the basis of their calculations – for example, Working for Families, student loans, child support and KiwiSaver.

Recommendation

That the submission be declined.