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Australian unit trusts under threat: Shewan

Top tax man warns people about putting money into Australian based unit trusts because of their tax benefits.

Monday, July 28th 2003, 5:09PM

by Richard Newell

A top New Zealand tax accountant has warned the financial services industry that the tax anomaly that makes Australian funds so attractive to New Zealand investors cannot continue indefinitely.

"I would not be putting clients into newly designed products marketed as Australian unit trusts at this moment," PricewaterhouseCoopers partner John Shewan told the Financial Planners and Insurance Advisers Association conference in Rotorua last week. "They will have a short shelf life."

"I think we are getting close to the point where the Inland Revenue Department will clamp down on this activity. The critical issue for all investors is whether they can be confident that gains made are not taxable. The most significant tax issue, by a long shot, is why, when a client sells out, an investment is not taxable.

"The assumption that just because an individual is making a capital gain that is tax free, is wrong. The critical issue is, why did you buy these shares or units? The IRD is going to start asking these questions."

The IRD is known to be preparing a paper on the issue of fund taxation and Shewan says the IRD could react in different ways. Although it has declined to act on the issue of UK unit trusts in the past, it may now decide to exclude Australian and United Kingdom-based trusts from the grey list exemption from capital gains under the Foreign Investment Fund law. Or it could repeal the grey list completely and strengthen the FIF.

Shewan thinks the Risk Free Rate method may be introduced for funds, but he also suggests a more sinister fourth option: "The Government could simply issue a statement introducing immediate measures to outlaw the practice. That would create huge waves in the industry and for clients."

He believes this is quite likely, given the current proliferation of Australian unit trusts in New Zealand and that fact that so many advisers are advocating moving their clients’ assets into these vehicles. Last weekend’s NZ Herald was all but recommending its readers to shift all their assets into these funds to cheat the IRD. That is bound to elicit some sort of response from the Government.

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