What a crazy time it is at the moment. It seems there are a massive amount of things going on in the market at the moment. I plan to comment on a number of things over the next week or so but will start with tax.

As reported on Good Returns Finance Minister Michael Cullen is seriously looking at the RFRM model for taxing offshore investments again.

I understand this work started some time ago but was only publicly revealed this week.

I had always been pretty supportive of RFRM as long as the thresholds were set at the appropriate level. However, when the detailed work on the idea kicked in it showed that while looking to be a simple approach, it is indeed very difficult to implement.

I suspect nothing has changed in the past year or so to make it easier.

Cullen himself has waxed and waned on the idea. On balance I suspect he has always been positively disposed towards it.

He quite rightly recognised there is an issue with paying tax in years when investments have lost money. When RFRM first surfaced international shares had taken a hammering and it was impractical to implement such a scheme.

The difficult issue at the moment relates to the hearings at Finance and Expenditure Select committee. If the government is going to change tack, or as John Key says, do a U-turn, what’s the point of continuing the FEC hearings on the regime in the current bill? It would be nice if the government clarified this situation.

I would say this tax issue is now a total mess and the government has handled it poorly. There is a defined process for how these things should be done, and in this case it hasn’t been followed.

A final point is this: Maybe we have learnt that if the industry lobbies hard and effectively it can get results (something it has been poor at in the past). At this point it seems like a bit of a victory for the organisations who have put so much into the cause.

Splitting finance companies into two groups sounds, like the Ministry of Economic Development suggests, seems like a reasonable idea, but it also seems to have some problems.

Clearly the big guys will opt-in for Approved Deposit Taker status, which by default will make them far more attractive to investors, particularly the conservative ones. In all likelihood theywill get to compete more closely with banks.

Those falling into the other regime will likely be classed as second class citizens. Especially, as the MED points out, because they will have to make it clear they are not ADTs.

What will be interesting is where the split occurs.

What I don’t like about it is that a well-run, smaller finance company which deserves to be in the ADT regime won’t be able to afford the extra costs.

To me segregating isn’t necessarily in the best interests of consumers. It is penalising small, well-run companies.

However mandatory credit ratings are. I have argued for these for ages. To me the key issue is that the government needs to approve ratings agencies. Anyone who plays in this space needs to have the necessary skills and experience and a rating agency should be out there kicking the tyres on the companies it researches. This includes going through loan books and making assessments on the quality of the business.

I’m not sure what the thinking of finance companies is on this regime at the moment as they have all be curiously silent. Only St Laurence has come out publicly in support of the proposals.

The other key point to come out of this, and one MED clear, is that this regime won’t remove risk from the sector. As MED deputy secretary Mark Steel said: “Will this prevent failures? No. No regime can prevent failures.”

However investors will have much better information available to help them make sound investment decisions.

I would love to hear your thoughts on this topic. Please email them through to me at Blog@goodreturns.co.nz

Had this response to our story and Blog on Revenue Minister Peter Dunne blaming opposition to tax changes on UK-Listed Investment Trusts

Mr Dunne is factually incorrect when he says that the opposition to the investment tax changes are being led by UK-based investment trusts. As a business with a client base approaching 1,000, we have as a result of client requests, provided a format by which our clients can voice their concerns to the politicians sponsoring this tax grab. None of our clients are invested in UK investment trusts. Approx. 70% of our clients will be worse off under the proposed changes. There is a reason the proposals have been roundly criticised by every one of the 3,800 submissions made to the select committee – it is simply bad policy. The legal and accounting fraternity have also expressed unanimous concern at this misguided policy – does Mr Dunne really think that both of those professional groups are only the mouth piece for the UK investment trust sector? The policy is fundamentally flawed and it is this issue which people are reacting against. An issue which Mr Dunne should concentrate on rather than trying to point the finger at red herrings. Given that returns from global equities were 186% of the returns from New Zealand equities, with less volatility, the proposals can only be seen as a cynical tax grab on ordinary kiwi mum’s and dad’s who have saved hard for their retirement. Either Mr Dunne is being very badly advised, or worse still, he is choosing to ignore the valid concerns of investors and their professional advisers alike.

Craig Myles, Myles Financial Planning

Also this over at Russell’s Blog