Baker critical of way AUT's promoted

Tower Managed Funds general manager Richard Baker is critical of fellow fund managers who have aggressively pushed the tax angle on their Australian unit trusts (AUTs).

Tuesday, August 12th 2003, 3:45AM

His personal view is that managers who have pushed the tax angle aggressively have brought the situation to Inland Revenue Department’s attention earlier than otherwise would have happened.

"The effect of that has been to engage the IRD’s attention earlier than may have been the case."

Last week the Government announced that it was unhappy with the use of AUT’s to get around tax laws, and it was prepared to ban their use.

Baker says the industry always knew that the so-called tax loophole wasn’t going to stay open forever, rather it was a case of when it would close not if.

However, he is critical of the way some AUT’s had been structured, and believes they were asking for trouble.

One of the main issues is about “circularity”. That is setting up an AUT to invest in New Zealand assets, particularly fixed interest ones, to get around paying tax.

Finance minister Michael Cullen says it is unacceptable for a manager to set up an AUT and invest in asset like New Zealand Government and pay next to no tax, when "an identical investment through a New Zealand vehicle would be clearly subject to New Zealand tax."

Another of the major issues highlighted by Cullen was the tax status of gains that New Zealand residents make on the eventual sale of their units. This comes down to the technical question of whether the investment was held on capital or revenue account.

Baker says Tower, which was one of the early adopters of AUTs when it set up two hedge funds, was very careful to make sure that this issue wouldn’t catch it.

While many of the AUTs only make distributions to unit holders in the form of tax-free bonus units, Tower made sure that each of its funds made distributions each year.

While the distributions are neither large nor tax-efficient, they do serve a purpose in terms of intent.

He says if someone invests in something with no chance of a dividend then it makes it hard to argue that the gains are tax-free.

This was a point made in Cullen’s speech: “It seems to me to be a mighty effort to argue that shares or units with no realistic dividend yield were purchased otherwise than for the purpose of sale. That would make all the gains taxable.”

Baker also questions some of the advice that fund managers have received.

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