PricewaterhouseCoopers' new chairman John Shewan is predicting that the Government will opt for imposing a risk free rate of return tax method on all offshore managed funds, but won't extend it to the local market.Speaking at the Society of Independent Advisers (SIFA) conference in Wellington on Friday he said that there was no way the status quo will remain.
He says the Government believes that there is "wholesale avoidance" going on; advisers have problems with the myriad of rules; and clients aren't happy.
The discussion document by officials on these tax matters has been delayed following a request to the minister from the Investment Savings and Insurance Association.
ISI chief executive Vance Arkinstall confirms as much, saying the association made an approach to Finance Minister Michael Cullen and it is now involved in the process.
The revised paper is due to be released at the end of this month.
"This issues paper will go much broader than people are expecting,” Shewan says.
He says it is more than just an issues paper about Australian unit trusts.
The three options are repeal of the grey list (Treasury's preference), marking to market and the risk free rate of return.
Shewan says there is little risk of Treasury's option getting off the ground.
He says some of the preliminary discussion from the funds management industry has been ill-informed. He says while it appears simple there are quite a few technical issues to overcome such as cash flow considerations, (paying tax when investments have made losses), transitional issues, valuation of assets in markets which have little depth, the allocation of associated debt and part-year adjustments.
Should the industry support RFRM?
On balance Shewan says yes. It is preferable to the FIF regime and simple to apply.
It should remove the bias in favour of offshore products and be positive for New Zealand shares and pooled funds. What's more it shouldn't be hard to beat the risk-free rate.
"If you guys can't beat 4% you shouldn't be in business in my opinion," he says.
On the negative side of the ledger he says it could create a bias against offshore investments, intuitively it's hard to grapple with (there is a disconnect between an investment's performance and its tax liability). He says some people may see it as "the thin end of the wealth tax wedge."
Shewan says the industry should be positive on RFRM. The status quo won't continue and the alternatives are more draconian, he says.
"RFRM is reasonably light-handed."
Shewan says people shouldn't panic about RFRM as it is still some way away. However he says advisers should be wary about putting clients into Australian unit trusts. They need to ask if the investment is appropriate given the changing circumstances and whether the investment makes sense post RFRM.
"Do not invest for tax reasons alone," he warns. While the onshore scene won't change much the offshore one will.
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