"Dividends and interest earned on the 78% of the fund invested overseas will be subject to withholding tax in those foreign jurisdictions. For example, dividends received from United States based companies will be subject to US income taxes.
"So the Guardians are quite right to look at the return they will make on overseas investments after such taxes have been deducted. Surely they should then however take into account the tax which will be payable in New Zealand. That’s a vital component. A worked example will illustrate this point.
"Let’s suppose that a dividend in the US and in New Zealand both yield a pre-New Zealand tax return of 6% but that the New Zealand dividends carry with them imputation credits. New Zealand tax at 33 cents in the dollar will be payable on the US dividends reducing the after tax return to 4%. By contrast the imputation credits on the NZ dividends will completely offset that tax yielding a tax paid return of 6%, ie: 50% higher than the US equivalent.
“Since the fund will pay New Zealand taxes I don’t see how the Guardians can ignore these realities. They have a statutory obligation to maximise returns and, and as every businessman or woman knows, that means “after tax”. This must surely have asset allocation implications in favour of New Zealand company equities. "I think the people of New Zealand deserve a detailed response and rationale concerning the position the Guardians have taken. I also invite media financial commentators to look into the issue because if the rationale is flawed then it needs to be put right sooner rather than later.”
BACKGROUND NOTE
This press release is based upon the specific advice given by the Guardians of the New Zealand Superannuation Fund that one of its key responsibilities and objectives is to “focus on pre-New Zealand tax returns” even although the fund itself is subject to income tax. Section 58 of the NZ Superannuation Act 2001 holds the Guardians responsible for investing the fund to, amongst other things, “maximized return without undue risk to the fund as a whole”. Since the fund pays tax it is logical to assume (and this is my assumption) that the returns which are to be maximized are after tax has been paid.
Accordingly the Guardians need to be asked to justify their focus on pre-tax returns for unless this is challenged how can we be sure that they have not incorrectly interpreted their responsibilities under the Act?
This is a press release from United Future's finance spokesman Gordon Copeland.
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