The Inland Revenue Department has allowed index funds to keep their tax advantaged status for another three years, but they have tightened up the rules.
The department has been reviewing its earlier decision to exempt passively managed funds from capital gains tax because the first of the original binding rulings was coming up for review.
In a decision announced last week (full text in features section) the department said it was important to give investors and fund managers some clarity on the issue.
Its position is that index funds can remain exempt as long as they meet about a dozen criteria.
While most of these appear to be reasonably straightforward there are some which may pose a few problems.
One is that the benchmark used must be "a generally recognised index that has identifiable rules and requirements that can be examined (eg: the NZSE40 or the MSCI World Index).
"If the index is one that has been created for the purposes of the fund, then the Commissioner will want to review its basis, and may either rule conditionally or decline to rule favourably. "
Two other points which may restrict index funds is that funds have relate geographically to generally recognised stock exchanges of New Zealand, Australia, the entire world (ie: a global index) or of all countries included in the grey list.
They generally can't be based on industries or sectors.
This latter point works against the latest trend in the funds management industry, namely sector funds like technology and biotech.
AMP Henderson Global Investors' Andrew Brockway says he is quite pleased with the decision.
He says the latest announcement shows the department hasn't changed its interpretation of the rules.
However, he points out that there are more conditions. On the surface this may seem bad, but in reality it gives managers more clarity over the rules.
IPAC Securities general manager David van Schaardenburg says a tightening of the rules limits the growth of new index funds and entrenches existing offerings.
He says the decision creates greater barriers to entry for people wanting to launch funds and potentially limits the development of new funds such as ones which track a particular sector.
Click here to read a full copy of the IRD's decisionIs the decision to roll over the binding rulings a good one?
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