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The government's "fair dividend rate" is not going to be fair for managed funds, says AMP Capital strategist Leo Krippner.

Rob Hosking

Monday 2nd October 2006

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The government last week announced a spectacular U-turn on its changes to the investment tax regime, dropping proposals for a complex capital gains tax regime for offshore investments and instead imposing what is calling a "fair dividend rate" of 5% on all offshore investments.

Individual investors will pay less than 5% if their investments make a lower return than that amount, and will have any returns above 5% tax free.

However managed funds will pay a flat rate of 5%, regardless of how well or poorly they perform.

Krippner says this is too high.

He calculated investment returns for four major global equity markets - the United States Japan, Germany and the United Kingdom - as far back as 1950.

Once adjusted for inflation (Krippner takes out the high inflation of the 1970s and 1980s and replaces it with an assumption of 2.5% inflation) he finds the average return is around 3.5%, and says that is what the rate should be for managed funds.

The present proposal, he says "effectively means that individuals will on average be taxed at a lower rate, thus falling short of the government's intention of placing individuals and managed funds on an even footing."

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