Sharebroking and investments: Tower warns of fishhooks in proposed tax

By Rob Hosking

Friday 22nd March 2002

Tower Managed Funds has sounded a further warning about the government's proposed wealth tax on offshore investments - even though the company is "cautiously supportive" of the move.

The government will find it difficult to confine the tax to offshore investments, the company's investments general manager, Richard Baker says.

The government is considering applying the risk-free rate of return model to investments made by New Zealanders offshore, as recommended by the McLeod Tax Review.

The method is seen as a way of cutting through the thicket of different tax laws applying to investments.

The main flaw has been seen that it applies a fixed tax rate at the start of each year, based on the current government stock rate. If, however an investor makes a loss on their investment they still have to pay the tax.

The McLeod Review only recommended the change for offshore investments but Tower says that could be difficult.

"There might be distortion away from domestically based funds.

"But we can see real benefits to New Zealand investors should the minister move as he is suggesting," said Mr Baker. "There is of course a lot of work to do to before the minister's indications of direction could become reality.

There is already a tendency for New Zealand investment to move further offshore, one driven by the market, the other by the government. The government-driven one is, of course, the superannuation fund, which is likely to invest most of its money in offshore equities.

The market-driven factor is the growing tendency for investors to move into hedge funds.

Tower itself acknowledged this trend this week with the launch of its Advantage hedge fund, in a link-up with Deutsche Bank's Offshore Value Fund.

As it is, Tower says the fund will have a tax advantage over New Zealand funds, but "it is not a tax-driven product."

Hedge funds are seen as a safer bet in the post-1990s equities boom world, he said.

"Hedge funds can be structured quite conservatively and we are definitely working at the lower risk area of the market."

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