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When is a loophole a loophole?

Friday, August 8th 2003, 2:04PM

Finance minister Michael Cullen reckons there’s a tax loophole which fund managers are using to get out of paying tax (one gets into trouble for saying they are avoiding tax).

All they have to do is set up an Australian unit trust – an AUT in the lingo of the dingo - and do their investment from Australia. Because AUT are treated as trusts across the ditch, as opposed to being companies (like in New Zealand) they can get out of paying tax through making distributions of bonus units to investors.

Our good old accountant friends at KPMG though say, no it’s not a loophole – rather it’s a distortion. Whatever it is, it’s quite big because many managers are now using AUTs, and by our estimates there would be $1 billion plus invested across the Tasman.

Putting aside the size thing, one of the more important observations is that the AUT fad actually threatens the very existence of our local funds management industry. Closing the loophole (or straightening out the distortion) is good from that perspective. But the bigger issue is why is the Government picking on AUTs, when there are plenty of other holes, including OEICs, UK listed investment trusts, residential property, direct investment?

Comments made yesterday by the likes of ING managing director, NZ Funds principal Richard James and Vance Arkinstall at the ISI are right on the button. Don’t look at AUTs in isolation, level the playing field across the board.

Right now it appears Cullen’s speech is a knee jerk reaction to comments in the media, as opposed to a well-thought through position. What is incredibly frustrating is that the industry has lobbied the government and officials for years over this issue and they took little notice. Then when there are a few stories in the media an announcement like this is made – hardly good policy making.

However, it has created some great comments so far, like this one: ”The savings industry has long resisted resorting to exploration of loopholes in the tax system.” Is that a tui I just saw fly past?

Tower’s Richard Baker is on the button when he says that it’s a competitive market and managers are always looking for an edge over their rivals. AUTs were one of these edges.

An interesting aside is that while plenty of managers have started using these vehicles others have made a decision not to. I guess this is a firm taking a longer-term view and saying the loophole will be closed at some stage.

Time will tell which strategy is best. Another point that has been made is that there are advantages, other than tax, in having AUTs.

What they are though has yet to be spelt out.

See stories:
We were forced through the loophole: fund managers
Govt to close down managed fund tax loophole
What Cullen said about Australian unit trusts

Other stories this week
The days of the syndicated property investment appear to be dead, as do contributory mortgages. During the week Dominion Funds Management did a Waltus and wrapped a whole bunch of its funds into one vehicle. Next week we have a story about a contributory mortgage firm that says it’s getting out of the business for a number of reasons – including the regulatory risk.
Dominion Funds restructures property holdings

Just as BNZ is about to sack its international bond manager the fund starts performing.
Performance pick-up at the death

Quote of the week
The hot topic in Sharechat’s forum in the past 24 hours has been news about a possible outbreak of Mad Cow’s disease. This week’s quote has to go to Lazy Haggis in the Sharechat forum.

“I used to have a variant of Mad Cow Disease myself several years ago, but fortunately with the assistance of the legal fraternity, I managed to divorce her.”

Go to Sharechat for all the latest business news, and discussion on issues www.sharechat.co.nz

On that note – have a good weekend.

Philip

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Lender Flt 1yr 2yr 3yr
AIA - Back My Build 6.19 - - -
AIA - Go Home Loans 8.74 7.45 7.05 6.85
ANZ 8.64 7.99 7.49 7.35
ANZ Blueprint to Build 7.39 - - -
ANZ Good Energy - - - 1.00
ANZ Special - 7.39 6.89 6.75
ASB Bank 8.64 7.39 6.89 6.65
ASB Better Homes Top Up - - - 1.00
Avanti Finance 9.15 - - -
Basecorp Finance 9.60 - - -
Bluestone 9.24 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Classic - ▼7.29 ▼6.85 ▼6.65
BNZ - Green Home Loan top-ups - - - 1.00
BNZ - Mortgage One 8.69 - - -
BNZ - Rapid Repay 8.69 - - -
BNZ - Std, FlyBuys 8.69 7.95 7.65 7.45
BNZ - TotalMoney 8.69 - - -
CFML Loans 9.45 - - -
China Construction Bank - 7.09 6.75 6.49
China Construction Bank Special - - - -
Co-operative Bank - First Home Special - 7.15 - -
Co-operative Bank - Owner Occ 8.40 7.35 6.89 6.75
Lender Flt 1yr 2yr 3yr
Co-operative Bank - Standard 8.40 7.85 7.39 7.25
Credit Union Auckland 7.70 - - -
First Credit Union Special - 7.45 7.35 -
First Credit Union Standard 8.50 7.99 7.85 -
Heartland Bank - Online 7.99 6.69 6.45 6.19
Heartland Bank - Reverse Mortgage - - - -
Heretaunga Building Society 8.90 7.60 7.40 -
HSBC Premier 8.59 - - -
HSBC Premier LVR > 80% - - - -
HSBC Special - - - -
ICBC 7.85 7.05 6.85 6.59
Lender Flt 1yr 2yr 3yr
Kainga Ora 8.64 7.79 7.59 7.29
Kainga Ora - First Home Buyer Special - - - -
Kiwibank 8.50 8.35 7.89 7.65
Kiwibank - Offset 8.50 - - -
Kiwibank Special - 7.35 6.89 6.75
Liberty 8.59 8.69 8.79 8.94
Nelson Building Society 9.00 7.90 7.39 -
Pepper Money Advantage 10.49 - - -
Pepper Money Easy 8.69 - - -
Pepper Money Essential 8.29 - - -
Resimac - LVR < 80% 8.84 8.30 7.89 7.69
Lender Flt 1yr 2yr 3yr
Resimac - LVR < 90% 9.84 9.30 8.89 8.69
Resimac - Specialist Clear (Alt Doc) - - 8.99 -
Resimac - Specialist Clear (Full Doc) - - 9.49 -
SBS Bank 8.74 7.95 7.45 7.29
SBS Bank Special - 7.45 6.95 6.79
SBS Construction lending for FHB - - - -
SBS FirstHome Combo 6.19 7.05 - -
SBS FirstHome Combo - - - -
SBS Unwind reverse equity 9.95 - - -
Select Home Loans 9.24 - - -
TSB Bank 9.44 8.19 7.55 7.55
Lender Flt 1yr 2yr 3yr
TSB Special 8.64 7.39 6.75 6.75
Unity 8.64 6.99 6.85 -
Unity First Home Buyer special - - 6.45 -
Wairarapa Building Society 8.60 7.15 6.85 -
Westpac 8.64 7.89 7.49 7.25
Westpac Choices Everyday 8.74 - - -
Westpac Offset 8.64 - - -
Westpac Special - 7.29 6.89 6.65
Median 8.64 7.45 7.37 6.77

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