One tax expert is warning that introducing a risk free rate of return method fix(RFRM) for taxing investments is like using a sledgehammer to crack a nut.
Deloitte Touche Tohmatsu tax partner Greg Haddon believes the only reason the Government is looking at RFRM is because of the proliferation of tax-effective offshore investment vehicles such as United Kingdom-based Open Ended Investment Companies (OEICS) and Australian domiciled funds.
He has two main concerns about introducing RFRM. One is that the scope of its introduction has not been clarified (although it appears the Minister of Finance is just planning to use it for international investments initially) and secondly it adds another layer of complexity into the already complicated tax laws governing investments.
Haddon says one of the best things any Government could do is have one tax regime for investments.
He personally favours introducing a capital gains tax.
"The biggest problem we have in New Zealand is the lack of a capital gains tax," he told a funds management conference in Wellington this week.
"A capital gains tax would probably fix a lot of our problems."
Haddon says there are other options open to the Government if it wants to remove the tax advantages enjoyed by OEICs and Australian funds.
One is to get rid of the Foreign Investment Funds (FIF) regime.
Although Haddon is not in favour of RFRM he says it could be good for fund managers as it would simplify the tax system.
Also it would remove "the distortion between passive and active funds."
Haddon says RFRM is not a wealth tax.
Finance Minister Michael Cullen says he will be revealing more about RFRM in the budget on May 23.
Meanwhile, Investment Savings and Insurance Association chief executive Vance Arkinstall says introducing RFRM is just "tinkering around the edges."
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