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We were forced through the loophole: fund managers

Fund managers says they were forced to use the tax-effective Australian unit trusts because the Government won't fix the NZ tax system.

Friday, August 8th 2003, 6:37AM
Fund managers aren’t particularly impressed with the Government’s announcement that it may crack down on tax-effective Australian Unit Trusts (AUTs).

A view expressed yesterday was that managers had chosen to use the AUT structure because the Government hadn’t fixed the problems with the New Zealand unit trust regime – despite being lobbied about it for years.

The industry has repeatedly told Government and officials that managed funds should be under a trust regime as opposed to a company one. That way individual investors would be responsible for tax on their investments and they would pay it at their marginal rate, as opposed to having their investments sit in a company structure and being taxed at a flat 33%.

Likewise they have pointed out the problems with the rules around foreign investment and inequities between different types of investment structures such as active and passive funds, and direct investment versus buying shares through a unit trust.

New Zealand Funds principal Richard James says that managers had a responsibility to use AUTs.

"As an asset manager we have to get the best possible outcome possible we can for our investors."

ING managing director Paul Fyfe says he is “frustrated” that AUTs have been targeted, “ahead of other areas seen as more pressing and more inequitable” and the Government is “stripping away one of the few incentives New Zealanders currently have for investing.”

“There is currently very little to encourage New Zealanders to save, and the Government is just about to make it even harder. I find it very disappointing that the only approach we can come up with is one that hinders those who are currently trying to invest for their futures – which is ironically just what the Government has been asking them to do.”

KPMG says “the funds management industry have maintained for a long time that the taxation of New Zealand’s savings is out of step with many other countries and that this inevitably causes distortions.”

The firm “doesn’t necessarily agree” that taking advantage of differences in another country’s tax systems is a loophole.

“We do agree that the differences in the way New Zealand and Australia tax unit trusts does allow certain amount of arbitrage that makes investments of this nature attractive.

This “distortion” could equally be said to be caused not so much by the fact that a loophole exists, but because of the way in which New Zealand chooses to tax unit trusts compared to the way other countries tax widely-held savings vehicles.

Investment Savings and Insurance Association chief executive Vance Arkinstall went as far as saying managers had been reluctant to use the AUT structure.

“The savings industry has long resisted resorting to exploration of loopholes in the tax system.

Likewise Tower general manager investment products Richard Baker says funds management is a competitive business and managers are going to look for any edge they can find and will always hunt for creative solutions.

Arkinstall says that hunt could shift ground if the government had addressed the problems faced by savers in last year’s McLeod Tax Review.

"This was a lost opportunity which may have pushed New Zealand product providers to seek creative solutions."

"Rather than negative messages, what New Zealand investors need to see are the steps that Government will take to provide a level playing field on which New Zealand saving products compete on an equal footing with a range of global saving opportunities, and further clear signals that increased personal savings levels are an important component of a strong vibrant and growing economy supported by actions that encourage savers”, Arkinstall says.

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