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

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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