Stobo provides tonic to funds management industry

Tuesday 16th November 2004

As has been well- signalled Stobo has recommended that capital gains tax on managed funds be removed.

He has also recommended the abolition of the grey list and foreign investment fund (FIF) rules for offshore portfolio equity investment and the removal of dividend taxation.

Stobo is also suggesting the implementation of an investment and savings tax (IST) for both foreign based and domestic funds.

This is essentially a risk free rate of return option.

While the IST idea has been welcomed for foreign-based funds it has not been warmly received for New Zealand based funds.

Stobo says this was one area of difference between himself and the majority of stakeholders.

"I favour the IST option subject to the rate setting method," he says.

As an alternative he is proposing that New Zealand based funds are treated under a "flow through regime" so that investors are paying tax on collective investment vehicles at their marginal tax rates.

This is similar to the way bank deposits are currently treated.

Stobo says there has been widespread consensus on the issue across the industry and there is a will for change.

"This consultation process uncovered a strong consensus to change the way New Zealand taxes investment income."

Stobo says other ideas which weren't considered in the report included flattening the tax scale and extending the brief of his review to other directly held New Zealand assets.

While these ideas are "economically sound" they were outside his terms of reference.

Finance Minister Michael Cullen is treating the proposals with some caution.

Cullen calls the report - which he commissioned in July - a "high level" one, and says there is still a lot of detail to be worked out.

"This hasn't been anywhere near my Cabinet colleagues yet." However he still intends to announce the government's direction on this issue in next year's Budget.

Implementation though is not likely until April 2007.

Cullen indicated support for the IST regime using the risk free rate of return method for offshore investments. "I've some degree of attraction for it for overseas investment," Cullen said when releasing the Stobo report.

"A lot of people investing offshore are overtaxed, and on that I'm leaning toward the IST solution." However applying it to collective investments within New Zealand is far more politically problematic, he says.

However applying it to collective investments within New Zealand is far more politically problematic, Cullen says.

Stobo argues for the IST rate be single, inflation-indexed rate, not higher than the government bond rate.

He says that, "because the tax liability is known from the beginning of the tax year, no-one should have any excuses for not planning for its payment at the end of the year."

PHIL'S BLOG: Dreaming about tax isn't a good idea, but if it happens....

Comments from our readers

No comments yet