The Government reckons it is losing about $20 million a year in revenue from the practice of super funds investing in passive funds.
It is proposing an amendment to the tax laws that would stop super funds receiving the benefits of passive management.
Although super funds are just another (albeit larger) investor in a passive fund they would, under this proposal, be required to pay tax on investment gains. However, an individual investor in a passive fund would be able to enjoy the capital gains tax free status of index management.
Finance minister Bill Birch says in briefing papers, that this practice has been identified "as a fiscal risk" to the Government, hence the tax changes.
A spokesman for his office says it's difficult to quantify the fiscal risk, but it is estimated to be "in the order of $20 million a year and rising," he says.
The proposal has drawn wide criticism from the savings industry. Investment Savings and Insurance Association (ISI) chief executive Roger Gill describes the proposed changes as "unfortunate".
"It really works against the interests of individuals who want to save through superannuation funds," he says.
The government was sending a very inconsistent message to the public. On one hand it urges them to save, on the other it penalises them for using professionally managed funds.
"It's against the principal of savings as it disadvantages a class of savers who want to invest indirectly rather than directly."
AMP Asset Management chief executive Roger Greville says while the Government's move impacts on super funds investing in passive funds, it doesn't directly affect the underlying products, such as WiNZ.
He says AMPAM is working through the issue with its clients to find suitable solutions to the problem.
Prudential tax manager Andrew Schmidt says the Government is over-reacting with its amendment.
He says if it had stuck to what it originally signalled, that is it would stop super funds actively trading passive fund units without being liable on investment gains, then there would be no major problem.
The Government reckons it is losing about $20 million a year in revenue from the practice of super funds investing in passive funds.