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Tax review raises serious concerns

The McLeod Tax Review if implemented would have some serious impacts on the investment communnity.

Wednesday, July 4th 2001, 11:07PM

The McLeod Tax Review if implemented would have some serious impacts on the investment communnity.

Most of the discussion on the report to date has been about the idea of taxing the equity in homes as a means of encouraging people to invest in other, more productive assets.

However, there are a number of key issues for the savings industry in the report, namely:

  • It prefers the current TTE taxation regime, as opposed to the TET regime favoured by finance minister Michael Cullen (see earlier story).
  • It supports keeping managed funds (with the exception of superannuation funds) under a company structure, rather than the trust structure which the industry has spent many years pushing for
  • It proposes to run a bulldozer over the playing field to put all investments on the same footing.

The argument for TTE over TET is simply that incentives don't work.

This point is even acknowledged by the Investment Savings and Insurance Association. ISI chief executive Vance Arkinstall acknowledges incentives may not necessarily increase the savings rate.

However, they may improve the savings habit.

For many years the managed fund industry has argued for funds to be treated as trusts as they are holding a bunch of pooled investments on behalf of unitholders. The argument goes the responsibility for tax should rest with individual investors.

The McLeod committee didn't buy this argument.

The biggest issue in the report though was how it planned to deal with investments.

Essentially it was against a capital gains tax and wanted to do away the split between capital and revenue, replacing it with the risk-free return model which has been talked about with housing.

It works like this. Instead of having tax on capital gains and income there would be one tax and that would be levied on how much money a person had invested at the start of each year.

The rate of return would be set annually on the amount of capital invested, not the level of dividends or the capital gains.

Good Returns plans to run a series of features on the McLeod report addressing some of the issues raised. The first feature, Tax review put funds on equal footing can be found here.

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