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Govt to adopt key McLeod review idea

Government plans to remove tax advantages enjoyed by some offshore investments.

Friday, February 22nd 2002, 10:30AM

by Rob Hosking

The Government has signalled it will change the way investments are taxed and incorporate suggestions made last year by the McLeod tax review.

Finance minister Michael Cullen said the changes will be outlined in this year's budget.

The McLeod report recommended that investment in shares and securities be taxed at a standard risk-free rate of return, regardless of the country of investment.

Cullen told an audience today he was looking for changes to the tax system which encouraged investments but which also would be likely to produce "the highest economic payoff for the lowest fiscal cost".

He feels the McLeod recommendations fit the bill.

The McLeod report put the conundrum on taxation of investments thus:

"On the one hand, New Zealand does not want to induce our most mobile taxpayers to consider moving from New Zealand. On the other hand, New Zealand does not wish to adopt a built in tax incentive that causes people who remain in New Zealand to see a tax advantage in investing offshore rather than in New Zealand.

"But it is precisely this type of system that produces a tax incentive to invest offshore that is the international standard."

A Treasury report on the issue will go to the minister within a month, and recommendations from that are likely to form the basis of implementing the policy.

Although Cullen stopped short of stating there definitely would be measures on the issue included in this year's Budget, it is understood this is the government's intention.

This appears especially likely since the Treasury has been asked to report on the issue: since the change of government in late 1999, the Treasury's role on most economic matters - especially those relating to taxation - has been to advise on implementation of policy already decided by ministers, rather than develop policy off its own bat.

The risk free rate of return approach was attractive "because it has the potential to make the relevant tax rules simpler, fairer and more effective," Cullen says.

It also provides the government with an election year counter to National's promise of tax relief for savings.

To read what Cullen said CLICK HERE

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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