Radical changes to taxing investments

Finance Minister Michael Cullen is promising “radical change” in how investments are taxed.

Tuesday, June 28th 2005, 12:57PM

by Rob Hosking

The government this morning released a discussion document on taxing investments.

As expected the document proposes using the “comparative value” method for taxing offshore collective investments.

What was not expected though was the option that investors in domestically based investment vehicles would have the option of using the same regime as offshore investors.

However the onshore investments will be exempt from the tax on capital gains which is part and parcel of the comparative value (CV) method.

CV subtracts the value of the investment at the end of the period from the value it was at the start of that period, and taxes the difference. If it is negative, that tax loss can be carried forward.

If it is particularly high, the tax can be paid over several years, and the new rules will not apply to individuals’ investments under $50,000.

A key issue is whether the rate should be at 100% of the change or a lower rate. An Inland Revenue paper in 2003 suggested 70%, and the Investment Savings and Insurance Association has suggested something closer to 50%.

However the discussion document rejects that.

“There is no magic number that provides the right percentage. When there may be such a percentage, it differs wildly from company to company, market to market, and from year to year. Any percentage used would be inherently arbitrary.”

Officials have concluded “the calculation of assessable income using a percentage of the change in an asset’s value is likely to give rise to tax integrity concerns. That could occur if an investment were made in a country that does not impose any tax on the investment. In such cases it would clearly be inappropriate for New Zealand to tax only a percentage of the income derived.”

As expected, the “grey list” countries will be abolished.

The aim is still to implement the changes from April 2007.

Submissions on the document, which can be downloaded from www.taxpolicy.ird.govt.nz, close on 30 September.