tmmonline.nz  |   landlords.co.nz        About Good Returns  |  Advertise  |  Contact Us  |  Terms & Conditions  |  RSS Feeds

NZ's Financial Adviser News Centre

GR Logo
Last Article Uploaded: Monday, April 19th, 7:51AM

Investments

rss
Investment News

Fact sheet 3: New tax rules for New Zealand managed funds

Tuesday, April 11th 2006, 11:45AM

Taxation of investment income

 

3. New tax rules for New Zealand managed funds

 

A new set of tax rules will treat investment through intermediaries such as managed funds (collective investment vehicles) in the same way same as direct investment by individuals, thus removing long-standing disadvantages of saving through funds. The new rules will prevent over-taxation of lower income savers, and eliminate the taxation of capital gains on New Zealand and Australian shares held through a fund.

From 1 April 2007, collective investment vehicles that meet certain qualifying criteria will be able to choose to use the new rules. They will be compulsory for KiwiSaver default funds, so will come into effect in tandem with the start-up of KiwiSaver.

 

Qualification criteria for the new rules

To qualify for the new rules a collective investment vehicle would need:

  • to have as its principal activity the provision of investment and savings services (as defined by the proportion of its underlying assets that are used to derive specified investment income);
  • to have at least 20 investors, with no individual investor holding more than a 10% ownership interest in the vehicle – the "investment in" test. There will be some exceptions from these requirements – for example, when a qualifying vehicle invests in another qualifying vehicle;
  • to own not more than 10% of any underlying entity (or 25% in certain circumstances) – the "investment out" test. There would be exceptions from this requirement for investments in other qualifying vehicles, real property and when the total of investments greater than 10% (or 25%) is not a significant portion (greater than 10%) of the value of the qualifying vehicle’s total portfolio;
  • not to issue separate classes of unit that stream different categories of income from the same asset to different unit holders; and
  • to meet the New Zealand tax residence rules (or be liable for tax in New Zealand on its worldwide income if not for the fact it is a qualifying vehicle).

Deliberate breaches of the "investment in" and "investment out" criteria (or failure to comply with the requirements outlined below) would result in forfeiture of qualifying status, with no ability for a vehicle to re-enter the rules.

Temporary breaches of the "investment in" and "investment out" criteria would be allowed on start-up or wind-down of a qualifying vehicle or due to inadvertent errors or factors outside the vehicle’s control.

 

Definition of "income" for a QCIV

Qualifying vehicles would not be taxable on realised gains on domestic shares (investments in New Zealand-resident companies) and Australian shares (investments in Australian-resident companies listed on the Australian Stock Exchange). This non-taxation of realised domestic and Australian share gains would not extend to situations where a qualifying vehicle does not have full equity risk associated with an investment. For offshore shares held outside Australia, taxable income would generally be 85% of accrued changes in share value plus dividends (taxable in full) – the "85% comparative value" method. The definition of taxable income would otherwise remain the same as it is under the Income Tax Act 2004.

Fees incurred by investors investing via a qualifying vehicle would continue to be deductible against taxable income derived via that vehicle.

 

Requirements of a qualifying vehicle and investors in qualifying vehicles

A qualifying vehicle would be required to pay tax on investment income, on behalf of investors. Lower-income investors could elect a 19.5% tax rate if their total income in the previous year is $48,000 or less. Others would be taxed at 33%.

A qualifying vehicle would have the option to pay tax on investment income (called an "attribution"):

  • quarterly (or more frequently), with tax paid at the tax rates of all investors who were present on the attribution date;
  • each time an investor exits the vehicle with a general attribution for investors who remain.

Losses made, and tax credits derived, by a qualifying vehicle that are in excess of the investment income of the vehicle would generally be able to be accessed by individual investors.

The tax paid by a qualifying vehicle on behalf of its investors would generally be a final tax. This means that individual investors would not need to return this income in their tax returns. This income would not affect individuals’ entitlements to family assistance (under the Working for Families package) or their student loan repayment and child support payment obligations.

 

Defined benefit superannuation schemes

A defined benefit superannuation scheme is a scheme where investors’ entitlements are not linked to their contributions.

Defined benefit superannuation schemes can also elect into the new rules and receive the exclusion for realised New Zealand and Australian shares gains. These vehicles would be required to pay tax at a flat 33% tax rate, rather than at investors’ tax rates.

 

Transitional rules

On entry into new tax rules, a qualifying vehicle would need to undertake a "notional windup" (a deemed disposal and reacquisition of the vehicle’s underlying assets) under which any underlying assets held on revenue account would be brought to tax and spread forward over three years. Any losses arising on transition would be available to offset investment income derived via the qualifying vehicle in future years.

« $110 million of tax cuts to improve fairness of investment tax regimeTax changes: Key's response predictable »

Special Offers

Commenting is closed

 

print

Printable version  

print

Email to a friend

Good Returns Investment Centre is brought to you by:

Subscribe Now

Keep up to date with the latest investment news
Subscribe to our newsletter today

Edison Investment Research
  • Electra Private Equity
    16 April 2021
    The realisation strategy – step by step
    On 15 April, Electra Private Equity (ELTA) announced the disposal of Sentinel – one of the company’s three remaining operating businesses –...
  • Axiom European Financial Debt Fund
    13 April 2021
    Capital opportunities
    Axiom European Financial Debt Fund (AXI) is a closed-end fund that invests in European financials regulatory capital. If a bank’s operations and...
  • Lowland Investment Company
    9 April 2021
    Positioned to benefit from UK recovery
    Lowland Investment Company (LWI) is riding high among its UK Equity Income peers over 12 months as a market rotation towards more cyclical and domestic...
© 2021 Edison Investment Research.

View more research papers »

Today's Best Bank Rates
Rabobank 0.75  
Based on a $50,000 deposit
More Rates »
Cash PIE Rates

Cash Funds

Institution Rate 33% 39%
ANZ 0.10    0.10    0.11
ASB Bank 0.05    0.41    0.42
ASB Bank 0.05    0.59    0.56
ASB Bank 0.05    0.61    0.64
ASB Bank 0.08    0.66    0.69
ASB Bank 0.08    0.72    0.75
BNZ 0.10    0.10    0.10
Heartland Bank 0.40    0.40    0.40
Kiwibank 0.05    -    -
Kiwibank 0.25    -    -
Nelson Building Society -    -    -
SBS Bank -    -    -
TSB Bank 0.25    0.25    0.26
Westpac 0.35    0.36    0.38
Westpac 0.05    0.05    0.05
Westpac 0.35    0.36    0.38

Term Funds

Institution Rate 33% 39%
ANZ Term Fund - 90 days 0.35    0.36    0.37
ANZ Term fund - 12 months 0.80    0.82    0.85
ANZ Term Fund - 120 days 0.45    0.46    0.48
ANZ Term fund - 6 months 0.80    0.82    0.85
ANZ Term Fund - 150 days 0.55    0.56    0.59
ANZ Term Fund - 9 months 0.80    0.82    0.85
ANZ Term Fund - 18 months 0.85    0.87    0.91
ANZ Term Fund - 2 years 0.85    0.87    0.91
ANZ Term Fund - 5 years 0.90    0.92    0.96
ASB Bank Term Fund - 90 days 0.35    0.36    0.37
ASB Bank Term Fund - 6 months 0.80    0.82    0.85
ASB Bank Term Fund - 12 months 0.80    0.82    0.85
ASB Bank Term Fund - 18 months 1.00    1.02    1.07
ASB Bank Term Fund - 2 years 1.00    1.02    1.07
ASB Bank Term Fund - 5 years 1.75    1.81    1.89
ASB Bank Term Fund - 9 months 0.80    0.82    0.85
BNZ Term PIE - 120 days 0.45    0.45    0.47
BNZ Term PIE - 150 days 0.55    0.56    0.59
BNZ Term PIE - 5 years 0.90    0.91    0.95
BNZ Term PIE - 2 years 0.85    0.87    0.91
BNZ Term PIE - 18 months 0.80    0.82    0.85
BNZ Term PIE - 12 months 0.80    0.82    0.85
BNZ Term PIE - 9 months 0.80    0.82    0.85
BNZ Term PIE - 6 months 0.80    0.82    0.85
BNZ Term PIE - 90 days 0.35    0.35    0.37
Co-operative Bank PIE Term Fund - 6 months -    -    -
Heartland Bank Term Deposit PIE - 12 months 1.00    1.02    1.07
Heartland Bank Term Deposit PIE - 6 months 0.90    0.92    0.96
Heartland Bank Term Deposit PIE - 9 months 0.90    0.92    0.96
Heartland Bank Term Deposit PIE - 18 months 0.95    0.97    1.02
Heartland Bank Term Deposit PIE - 2 years 1.00    1.02    1.07
Heartland Bank Term Deposit PIE - 5 years 1.00    1.02    1.07
Kiwibank Term Deposit Fund - 90 days 0.35    0.36    0.37
Kiwibank Term Deposit Fund - 6 months 0.90    0.91    0.95
Kiwibank Term Deposit Fund - 12 months 1.00    1.02    1.07
Kiwibank Term Deposit Fund - 150 days 0.60    0.61    0.64
Kiwibank Term Deposit Fund - 120 days 1.00    1.02    1.07
Kiwibank Term Deposit Fund - 9 months 0.80    0.82    0.85
Westpac Term PIE Fund - 150 days 0.55    0.56    0.59
Westpac Term PIE Fund - 120 days 0.45    0.46    0.47
Westpac Term PIE Fund - 18 months 0.80    0.81    0.84
Westpac Term PIE Fund - 12 months 1.00    1.02    1.07
Westpac Term PIE Fund - 6 months 0.80    0.81    0.84
Westpac Term PIE Fund - 9 months 0.80    0.81    0.84
Westpac Term PIE Fund - 90 days 0.35    0.36    0.37
Westpac Term PIE Fund - 2 years 0.85    0.87    0.91
About Us  |  Advertise  |  Contact Us  |  Terms & Conditions  |  Privacy Policy  |  RSS Feeds  |  Letters  |  Archive  |  Toolbox
 
Site by Web Developer and eyelovedesign.com