IRD unveils solution to AUT issue

The IRD has backtracked on previous indications that the proposed AUT solution would be narrow and designed to deal only with the “mischief” of New Zealanders investing tax free into NZ government stock.

Monday, April 19th 2004, 6:12AM

by Rob Hosking

The full extent of official determination to hit perceived tax leakages from Australian unit trust investments was unveiled to the financial services industry last week.

Inland Revenue officials handed their proposals to the industry on Wednesday, giving them until 5pm Friday to respond.

The proposals come as fresh questions are asked as to just how much tax leakage there really is from AUTs.

Investment Savings and Insurance Association chief executive Vance Arkinstall could not divulge the details of the IRD’s proposal, citing a confidentiality.

However he says the IRD’s proposals go too far. The main concern from officials – and public comments from Revenue Minister Michael Cullen seem to support this – appears to have been New Zealand investments in AUTs which then invest in New Zealand debt securities, in particular, New Zealand government stock.

However, the proposal put forward by the IRD would see any bonus issue of units from any entity taxed, irrespective of its underlying investments.

The proposed legislation “would apply generically to all unit trusts (foreign and domestic).”

There is likely to be widespread opposition to such a proposal, from both within the industry and amongst tax practitioners. The strong preference expressed by these groups to date has been to deal narrowly with the “mischief” and ensure that any reform with wide ranging impact be inclusive of all investing vehicles.

A paper will go to Cabinet in early May, and from there any law change will go to Parliament’s finance and expenditure select committee, where interested parties can make submissions.

That still leaves the issue of how much mischievous tax leakage there is around AUTs. Arkinstall says the industry calculates about $150 million of funds invested in NZ government stock goes through these vehicles. This is backed up by an industry survey conducted by FundSource last week (which also estimated “that at least 130,000 individual New Zealanders may be affected by any legislative changes specifically directed at investments into all Australian unit trusts”).

“If you assume a yield of 5% and tax of 33%, that’s a tax bill of about $2.6 million, which in fiscal terms is hardly worth worrying about,” says Arkinstall.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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