by Rob Hosking
Revenue Minister Michael Cullen’s office indicated yesterday that the ‘risk free rate of return’ method of taxing offshore equities - recommended by the McLeod Tax Review in 2001 - would be included in the discussion document.
However one option under consideration is to extend it to investments within New Zealand as well.
The Inland Revenue Department is understood to be leaning towards this option: the Treasury is apparently more sceptical and would prefer an extension of the current FIF regime.
The catalyst for the discussion document was the government’s discovery that many New Zealand investors are putting money into Australian unit trusts which invest in New Zealand government stock and offer associated investment products that are claimed to be free of New Zealand income tax.
Identical investments through New Zealand investment vehicles would be subject to New Zealand tax, and the government moved quite suddenly in August to signal it would be closing this loophole.
However that process has brought the much wider issue of taxation of all investments offshore into the mix - and possibly onshore investments as well.
The focus though is likely to remain on offshore investments, says Kensington Swan tax partner Anthony Lines.
“But possibly that will bring passive funds into consideration as well,” he says.
"The governing principle for officials is that any tax change must not lose revenue. That was why they moved against the Australian unit trusts, although that has been happening since 1998.”
The strength of the ‘risk free rate of return’ method of taxation - which assumes a profit on investments of the government stock rate minus inflation, and taxes them accordingly regardless of the return the investment actually made, is that it ensures a steady stream of revenue.
“For the same reason it needs to apply to investments on capital account and not just the securities in collective funds which are on revenue account at present. “That would also mean bringing passive funds into the mix, as well as investments in ‘grey list’ countries such as OEICS and Australian unit trusts.”
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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