RFRM back on agenda

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Finance Minister Michael Cullen has signalled a government U-turn on investment tax, telling a pre-caucus media scrum the risk free rate of return approach is back on the agenda.

Wednesday, September 13th 2006, 5:05AM

It is also understood Cabinet papers are being prepared and will be considered by ministers next week.

Cullen told journalists yesterday the government is taking up a suggestion from PricewaterhouseCoopers’ tax partner John Shewan that the government take another look at a form of the risk free rate of return method (RFRM), first proposed by the Rob McLeod-led tax review in 2001.

The government mulled that proposal over for three years before rejecting it, on the grounds it is more complex than it looks and also because people pay the same amount of tax whether they make a gain or a loss.

The PWC proposal sets the deemed rate at 3%, rather than the 5% rate earlier looked at by officials.

Shewan told the Finance and Expenditure Select Committee that this lower rate would make up for the fact that the method of taxing investments applies regardless of whether the investment makes a gain or a loss.

The method though has the appearance of being simpler than the government’s current proposal which taxes capital gains at 85% of their gain, capped at 5% change each year.

The proposals have received an unprecedented number of submissions opposing them.

Select committee hearings are still taking place – more submissions are being heard today, and the last are not due to be heard until the end of the month – but Cullen appeared to pre-empt this process yesterday.

RFRM is “not actually in principle a different approach” to that proposed in the current bill, Cullen says.

“I think the way the submissions are going . . . that some variant of the deemed rate of return is likely to emerge from the select committee process, and I’m perfectly comfortable with that.”

It is however still highly complex. Institute of Chartered accountants tax director Craig Macalister says it is “like exchanging a wiring diagram for the space shuttle for something out of Dr Seuss”.

The Investment Savings and Insurance Association has indicated to MPs it could live with RFRM, although that approach is not its first choice.

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