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Call for crackdown on tax disclosure requirements

Australian fund managers offering products to New Zealand investors should be compelled to give more thorough advice on the tax implications of the investing decisions.

Wednesday, April 12th 2017, 6:00AM 2 Comments

by Susan Edmunds

That’s according to Anthony Edmonds, of investment management firm Implemented Investment Solutions.

He said a lot of New Zealanders were putting their money into Australian unit trusts, under the two countries’ mutual recognition of securities regime.

But the tax issues were not always made clear to them.

He said there could be tax leakage and there was no deductibility of fees when money was in an Australian unit trust.  While there could be some tax benefits, that was not a given, he said.

“Under mutual recognition, there is no requirement on the managers to explain these complex tax issues. This is an anomaly in what is now an environment of a big focus on the regulation in terms of investors being able to clearly understand the consequence of the things they invest in.”

He said fund managers were only required to make a generic statement about investors seeking appropriate tax advice.

But he said because the issues were complex it was very hard to find tax advisers with the right investment knowledge to offer any help.

“The Australian managers are best placed to explain the tax nuances of their product. It is product specific. There should be a requirement for them to do so if they are positioning their funds to be sold to Kiwi investors. It’s a big loophole in New Zealand’s disclosure regime."

A spokesman for the FMA said it was an issue that market participants had raised.

“Inland Revenue notes that this area is complex and its website tells investors to seek professional advice. Tax implications often turn on an individual investor's circumstances and that is why it is important the individual seeks advice,” he said.

“Disclosure standards for Australian funds are the responsibility of ASIC. Further, ASIC and the FMA have also entered into an MOU relating to supervising, assessing, securing compliance with or enforcing the respective laws and regulations of each authority so in certain circumstances we will intervene to protect NZ investors. We currently do not think that this circumstance is one that warrants such intervention.”

Tags: tax

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Comments from our readers

On 13 April 2017 at 6:40 pm Anthony Edmonds said:
For clarity, many individuals get significant tax benefits from using FIF global share funds (which is why things like Australian Unit Trusts are popular with advisers and their clients).

These benefits result from individuals being able to switch between the FDR and CV tax treatments, coupled with an individual's ability to elect to pay tax on their 1 April portfolio values (meaning that the contributions and gains they make on their FIF global shares during the year aren't taxed).

The key point that I have made to Susan remains, being that Australian managers who elect to offer funds here under Mutual Recognition should have to make meaningful disclosures relating to any material issues like tax slippage for NZ investors.
On 14 April 2017 at 11:58 am Anthony Edmonds said:
Boom - thinking about the problem I had with the FMA's spokesperson's comments helped crystallise my thinking, and my belief that this is an issue for the FMA to address.

The tax slippage is a specific function of the Australian Trust - so is specific and unique to each fund. The way in which any slippage impacts on NZ investors is generic.

Here I mean all NZ investors are impacted equally by the slippage in the specific fund, and this is not a function the individual NZ taxpayer's situation (as implied in the comments from the FMA). This is why it should be over to the investment manager offering the fund to make this disclosure.

Note that the potential benefits I referred to in my early comment are specific to an individual's circumstances. This reflects that this is all about whether the individual is better in a FIF or PIE funds for global shares generally.

While related, this is a distinct and separate issue. These two issues are only then related in that an individual might be better off in FIF funds because of their personal circumstance, but then inadvertently invest in a specific FIF investment fund where the tax slippage in that fund is large enough to offset the benefit that arose from their personal circumstance.

So the IRD's position makes sense, but I think that the FMA needs to look at and understand this point more carefully.

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