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FDR fundamental change to tax system

UPDATED: Accountancy firm Ernst and Young has come out swinging against the fair dividend rate (FDR) tax regime for international investments. But the Minister of Revenue swings back.

Tuesday, October 31st 2006, 6:30AM
Ernst & Young Tax Directors Jo Doolan and Geof Nightingale are particularly concerned about what happens when investors can’t determine the market value of their offshore investments.

Under the proposed fair dividend regime individual investors, in most cases, will be taxed on 5% of the market value of their portfolio shares at the beginning of the year, regardless of what they actually earn on their offshore portfolio shares.

For those who cannot determine a market value then a cost based variant is available. Each year the cost base is increased by 5% and dividends received are not subtracted from the cost base.

The result, says Doolan and Nightingale, is taxation on notional gains, not actual gains.

Further, they point out that because the gains are not realised then cash flow difficulties could be faced when having to pay the actual tax.

"On the face of it the latest proposals appear to be a workable compromise on the previous proposals. But with smooth words, the government is actually trying to slide through something that represents a fundamental change to the whole basis of New Zealand’s taxation," Doolan says.

"Implicitly you will be taxed on part of the capital gains. It’s a complete leap from any system of taxation that currently exists in New Zealand. The proposals represent a fundamental change to our whole basis of taxation. If this goes through, what’s to stop the government applying the same method of tax to the housing market and domestic investments?"

They are also concerned at the speed with which this new proposal is being pushed through Parliament and with limited consultation.

"It’s a big risk to take for the Government. Particularly, as the proposals remain complex in compliance terms and will still leave distortions between investing directly and via managed funds," Nightingale says.

As reported earlier the Finance and Expenditure Select Committee are planning to ask a selected group for their views on the regime, rather than allowing anyone to make submissions.

Revenue Minister Peter Dunne says Ernst and Young are potentially misleading people with its comments.

Ernst and Young appear to be saying people will be taxed a t flat 5% rate when it is proposed deemed income can be less than 5% under FDR.

Dunne says Ernst and Young’s comments are "misleading." "They give the clear impression that investors will be taxed on a flat 5% return regardless of how their shares performed.

"In fact, if investors can show that their total return on their offshore shares is less than 5%, they will be taxed on this lower amount. No tax payable would be payable if the total return was negative," Dunne says.

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