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A blow for passive funds

A planned change to tax rules may seriously undermine the effectiveness of some passive fund structures.

Monday, June 29th 1998, 12:00AM

by Philip Macalister

The Government has moved to close a tax loophole which has the potential to seriously undermine the effectiveness of passive funds.
The changes relate to superannuation funds which invest in passively managed group investment funds (GIF). Until now the tax advantage of a passively managed GIF could be passed up to the superannuation fund and therefore its members.
That meant the super fund wasn't paying tax on any capital gains made through the passive GIF.
Finance minister Bill Birch says that superannuation funds have been avoiding tax by putting a passive fund between the superannuation fund and the share holdings.

He says this practice has been identified "as a fiscal risk" to the Government, hence the tax changes.
The changes won't affect individual investors in passive funds, but they will impact on people who choose to invest through super schemes.
Some funds such as WiNZ and TeNZ have significant numbers of super funds as investors.
Several managers spoken to by Good Returns have described this tax change as a major blow for their funds.
While the change maybe technically correct, one says, it flies in the face of the Government's call to New Zealanders to increase savings.
Prudential tax manager Andrew Schmidt says some in the industry have anticipated the Government would make such a move on GIFs therefore they have opted for superannuation fund structures instead.
However the Government is looking to stop that practice also.
Says Birch: "Another aspect of the problem is investment by superannuation funds into other super funds. This will be the subject of a forthcoming consultation paper that may lead to legislation later this year."
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