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Small concession in tax changes

By Rob Hosking

Tuesday 11th April 2006

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The managed funds industry appears to have won a concession out of the government over changes to the way investments are taxed.

As recently as two weeks ago officials and minsters appeared to be firmly sticking to the comparative value method of taxing offshore capital gains at 100% of the gain.

In last year's discussion document on the issue officials stated there was no logical reason for taxing the capital gain at anything other than 100% of that gain.

The managed funds industry replied that this meant there was no logical reason for not having it at any other percentage either.

Today's release by Finance Minister Michael Cullen and Revenue Minister Peter Dunne show the industry has one some ground on this - the shift will be calculated at 85% of the change.

The rest of the package announced by ministers is pretty much in line with earlier indications.

As reported by Good Returns last month, investments in Australia will not be included in the offshore capital gains tax applying to other offshore investments.

To remain so, however, they will have to be invested through a qualifying collective investment vehicle (QCIV).

One other clarification with the QCIV regime is that although investments will be taxed on a "look through" model based on the individual investor's tax rate, this is capped at 33%.

This is partly justified as a way to encourage people to put more of their extra income into savings vehicles, but it also addresses what would have become a major difficulty for some existing schemes.

Because at present the earnings are taxed at a flat 33%, existing schemes would have faced the difficult choice of either becoming a QCIV - and subjecting their higher earning members to more tax - or staying outside the QCIV regime and penalising their lower-earning members.

Funds which wish to become involved in the government's KiwiSaver workplace savings scheme also have to become QCIVs.

In a joint statement, Cullen and Dunne concede there are winners and losers under the changes.

"The losers in this case will tend to be sophisticated direct investors who have enjoyed considerable tax advantages under the old regime and who have the ability to easily adjust their investment arrangements.

"The winners will be thousands of ordinary, hard working New Zealanders who the government is helping to achieve long term financial security."

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