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.
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
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
