He told last week’s FundSource conference that originally he supported FDR, but now believes it will fail and a deemed dividend method of taxing international investments will prevail.
Key’s comments are important as the FDR bill is currently before the Finance and Expenditure Select Committee, and it is this committee, not the ministers, who will determine what happens with the proposal.
Key’s view is that FDR is fine in theory, but it starts to become complicated when investors make transactions during the financial year.
He says a deemed dividend rate of around 3% is about right.
“If it was something like 3% then I think you’d have something most people can live with,” he says.
One option Key floated is that the Inland Revenue Department gives investors the choice of using either a deemed dividend rate or FDR.
He says it already gives businesses choices in other areas of tax so the idea of having two systems isn’t anything new.
However, Key noted: “IRD are a little reluctant (on this idea).”
His view is that over time the majority of investors would use the former and FDR would be done away with.
“FDR will be dropped over time.”
Key also takes issue with some of Finance Minister Michael Cullen’s comments on the tax changes and the funds industry.
He says Cullen argues the funds management industry should be grateful for the changes as they do away with capital gains tax currently being paid.
However, he doesn’t point out that index funds, which currently have many billions of dollars of funds under management, will move from a tax advantaged position to one where they have to pay tax.
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