by Paul Mersi
It is frustrating to investors and advisors alike that over the past few years the uncertainties about the current and future taxation of savings seem to have simply gotten greater.
Last year there was probably more discussion of the fundamentals of savings (and their taxation) than we have seen for many years, and while it is necessary and interesting, we are overdue for some decisions to be made and directions set so that investors and advisors can get on with things.
There has been a lot of frustration expressed from all quarters about the nature and level of savings and tax almost always seems to feature - either as the provider of a potential solution, or as a cause of a problem.
Capital gains
Nonetheless, in the absence of a capital gains tax, most pooled investment vehicles will continue to be hampered in attracting funds from individuals who are directly investing in equities and who, for the most part, will not be accounting for tax on their equity gains.
Increasing numbers of these investors, though, are being attracted to directly invest in equities through the wrap account type of product which offers the potential of the best of both worlds: professional management but (ostensibly) no tax on capital gains.
In light of recent tax cases and the IRD's own approach to determining the tax status of pooled vehicles such as unit trusts and superannuation funds, this outcome seems anomalous.
The practical reality is though that the IRD's lack of resources and focus in this area leaves all but the most obvious speculators achieving a result that fund managers can only dream of (short of programming their computers to index-track).
It is now the rule rather than the exception that vehicles such as unit trusts and superannuation funds treat all of their equities as being taxable - a result that in my view arises more from the combination of IRD assertiveness and a desire on the part of trustees to avoid unexpected tax adjustments in the future than necessarily where courts would draw the line.
For all practical purposes then, managed funds are subject to tax on capital gains so the introduction of one should be a welcome prospect, offering some levelling of the playing field with respect to direct investment by individuals.
Tax incentives and TET
At a more general level, dissatisfaction
with New Zealanders' savings behaviour combined with concerns
about the affordability of state-funded pensions has caused much
of the recent discussion to focus on compulsory savings or some
degree of incentivisation through the tax system (something which
until very recently was almost universally viewed as an anathema).
Reverting to incentives such as an exemption or rebate for amounts saved has been suggested by some, while the Minister of Finance seems enamoured of a more subtle incentive of allowing gains from savings to accumulate free of tax in pooled vehicles, to be taxed only on withdrawal (hence tax-exempt-tax, or TET). While the prospect of having one's savings compounding without tax seems wonderful, investors would have to be concerned about the equity of how those savings will be taxed on withdrawal, and the Government too may have some concern about the increasing drain on the tax base over the long term.
Tax as a cost
While the above big picture issues have
a high public profile, there are a number of other tax issues
which give rise to uncertainty and/or cost of which many investors
would be unaware.
For example, the application of what is in essence a company tax regime to unit trusts and certain group investment funds has given rise to some persistent and troublesome tax issues. It is pleasing to report, though, that increasing awareness of the more significant of these (the so called 'negative dividend syndrome, imputation continuity rules, and lack of expense transferability) gives us hope that satisfactory legislative solutions may not be too far away.
Appropriate solutions will relieve trustees and managers of some risk and cost both of which should be of benefit to investors.
GST, too, is a source of long-term frustration, risk, and cost for the managed funds industry. Most significantly, there persist significant differences of view on whether or not particular fees common in the industry are subject to GST and there is clear potential for some degree of increase in fees if GST becomes more broadly applied to such fees either through legislative amendment or IRD enforcement strategy.
Also looming on the horizon is a possible change which may affect some fund managers more than others: the GST 'reverse charge mechanism'. This is being considered at the moment by officials and would have the effect of imposing GST on the purchase of certain non-financial services from offshore suppliers.
While it is fair to say that such suppliers (through not being subject to GST) are currently advantaged vis-a-vis New Zealand-based suppliers, it is also a reality that more and more multinational fund managers are required to centralise many services and do not therefore have any choice but to take certain services from affiliates offshore.
Thus, if such a measure is introduced, it will put further pressure on fund manager's costs.
The tax triangle
One persistent frustration that finally
looks like it may have its day is the so-called 'triangular' tax
issue with Australia. Politicians seem to be warming to the concept
of, for example, New Zealand investors being able to claim some
imputation credits on dividends from Australian companies which
pay tax in New Zealand.
Given the potential fiscal costs, though, the degree to which companies will be able to take advantage of this is likely to be limited. Thus, we may see a marginal improvement on the current situation but it is likely to fall short of getting full value from the New Zealand tax paid by these companies through to their New Zealand shareholders.
Conclusion
While it is good to see more focus on savings
and the associated tax issues, the increased profile brings with
it an increasing awareness of uncertainties that the industry
and investors face. Hopefully, 2001 is the year where at least
some long standing tax issues can be resolved, and where some
clear direction is given as to what tax environment investors,
fund managers, and trustees can expect to be operating within
over the next few years.
Paul Mersi is a tax partner and head of financial services at PricewaterhouseCoopers.
Paul Mersi is PricewaterhouseCoopers Tax Partner and Head of Financial Services
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