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Tax changes: Winners and lossers

Yesterday’s announcement on changes to the taxation of investment income has created much comment. In this piece Good Returns summaries what people and firms are saying.

Wednesday, April 12th 2006, 7:45AM
Ernst and Young takes the line that the changes are “certainly a move in the right direction.”

Its Tax Director Matthew Hanley helpfully outlines the winners and the losers.

The Winners: Onshore Investors. Hanley escribes says the domestic component of the reforms is “a triumph for tax neutrality.”

“The broad principle is that income of qualifying collective investment vehicles will be taxed at the marginal tax rate of investors. This will apply to all income of these vehicles including dividends, interest and rental income.

Hanley believes the government has responded proactively to the plight of funds managers and trustees where there are investors on different marginal tax rates investing in particular collective investment vehicles.

Another win is that losses and tax credits of qualifying collective investment vehicles will flow to investors and will be paid out in cash to investors by Inland Revenue.

The Losers: Offshore Investors. While Australian investments will be treated in the same ways as New Zealand ones the exemption doesn’t go far enough, Hanley says.

“It is disappointing this Australian exemption is not broader to cover unlisted Australian companies and unit trusts. There will be investors holding employee shares in unlisted Australian companies this could affect.”

Other offshore portfolio equity investments will be taxable at 85% of the charge in market value (referred to as the comparative value approach).

While this is less than the 100% originally proposed, Hanley believes it is still too high. “This 85% basis is a reduction from the original 100% and is an effort to address the significant concerns submitted to the Ministers that the 100% basis is an inaccurate proxy for earnings from offshore portfolio equity investments. Even at 85%, this is still an overstated earnings proxy.”

Meanwhile Fisher Funds management managing director Carmel Fisher trumpets the changes as great news for investors capital markets.

“The removal of what has been, in effect, a capital gains tax on managed funds marks the beginning of a new chapter for investors and for New Zealand’s capital markets,” she says.

Fisher says the changes to Australasian investments will produce better long-term returns for investors in managed funds.

She also thinks the changes will reduce the popularity of residential property investment.

“New Zealanders have typically invested too much of their wealth in residential property,” Fisher says. “(The) changes should see a rebalance of investors’ portfolios towards shares.”

NZX boss Mark Weldon also is supportive of the changes, heralding them “as evidence that New Zealand equity investments would at long last be able to come into their own.”

"For a long time we've had an imbalance in local tax treatment of investments that has seen New Zealand-based equities at a significant tax disadvantage relative to other investment types.

He takes a similar line to Fisher. "The tax changes mean that New Zealand equities will be able to compete more effectively on price, which will be very positive for New Zealand capital markets.”

"The abolition of the grey list, and its replacement by an exempt zone for Australia and New Zealand based on residency and listing, will deliver a 'one-time switch of competitiveness', which is great news for New Zealand companies, because it frees up access to local capital.

"It's also great news for New Zealand, because a higher proportion of the savings base will be here, in our own country, benefiting our own companies, and serving our own economy," Weldon says.

Financial planner and philanthropist Gareth Morgan is scathing on some of the changes.

He starts his release thus: “Today is not a great day for taxation reform. There have been some advances – such as the treatment of managed funds. But there has been an intellectual implosion in the quality of our international tax regime.”

He notes that the ministers want a system that doesn't encourage investors to favour investing overseas over investing in New Zealand”.

“So they’ve introduced one that favours them investing in New Zealand,” Morgan says.

“What is the logic these ministers employ to replace one distortion with another? Especially when it is so easy to get it right so that investors are not influenced at all by taxation when making their investment decisions. The initiative of the Ministers is most regretful, will hurt the safety of New Zealanders’ savings and plays right into the arms of the insurance industry that are searching for ways to help make their ‘savings’ products regain competitiveness.

Apart from the insurance lobby, real estate agents and Mark Weldon there would be few New Zealanders who would welcome this international tax regime.”

Morgan also takes umbrage at the ministers’ comments that the “winners will be thousands of ordinary, hard working New Zealanders who the government is helping to achieve long term financial security."

Morgan’s response: “To the extent New Zealanders’ savings are put in peril through an over-investment in this economy and through being force-fed obscure 'savings' products of the insurance industry that stand ready to devour these fund flows, the Ministers couldn’t be more incorrect.”

He believes the ministers have been captured by lobbyists. “Portfolio Theory 101 tells us that diversification is the key to protecting wealth. Cullen and Dunne regard diversification as New Zealand and Australia – I wonder where they were trained?

“The ministers should have listened to their advisers that argued the importance of tax neutrality. If they had they would have introduced a regime that allowed Kiwis to spread their risk by investing around the world and not being subject to a selective capital gains tax imposed by the IRD.

« Tax changes: Key's response predictableFollow-the-market not necessarily the best approach »

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