The $25 million New Zealand Investment Trust (NZIT) has scored an own goal and squandered its favourable tax status for a year.
The United Kingdom-based trust will not be able to apply for investment trust status for the year ending October 31 as it has breached legislation relating its holdings.
As a result it will have to pay tax on any capital gains made during the year.
The breach relates to its holdings in various Fletcher Challenge letter stocks. Under the relevant legislation investment trusts are not allowed to hold more than 15 per cent, by value, of their portfolio in a company or a group of related companies.
NZIT told the New Zealand Stock Exchange that in the 1998 financial year significant additional investments had been made in a number of entities which form part of the Fletcher Challenge group.
"As a result of these transactions the company has inadvertently breached one of the conditions for qualification as an investment trust for the purposes of the Income and Corporation Taxes Act 1988," it says.
"As a consequence, the company will not be able to apply for investment trust status for the year ending October 31, 1998, and will therefore be subject to tax on any net realised gains made."
At least three other investment trusts have run into this problem recently.
While the error is a blow for the trust, its impact has been diluted somewhat by the fact that the market has weakened in recent months and its portfolio is carrying "significant unrealised losses."
The trust says it intends to make use of this position so as to avoid a net realised gain in the year ending October 31.
"In these circumstances the absence of investment trust status will not result in any diminution in the value of shareholders' funds, nor have any other adverse consequences for shareholders based in the UK or New Zealand," it says.
Despite losing its investment trust status this year, its status for 1997 has been confirmed and the manager intends to resume its position in future years.
NZIT is managed by Exeter Asset Management in England and is advised by New Zealand-based Coronet Asset Management.
It is dual listed on the New Zealand and London Stock Exchanges and has been popular with New Zealand investors because of its low fees and capital gains free tax status.
The $25 million New Zealand Investment Trust (NZIT) has scored an own goal and squandered its favourable tax status for a year.