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When mistakes are forgivable

By Peter V O'Brien

Friday 8th August 2003

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Perpetual Trust is the latest entrant into the corporate red-face club in its role as trustee for Nuhaka Farm Forestry Fund.

The trustee's redness is closer to pink than the crimson that flushed many others this year, given its error was relatively minor when placed against announcements of multi million-dollar write-offs.

Nuhaka unitholders received a letter recently clarifying tax treatment of distributions from the fund.

Perpetual general manager strategy and projects Jeff Stainland referred to unitholders' receipt on June 27 of a taxable distribution of 91c a unit.

"This distribution was made either without the deduction of tax, or, if you are non-resident, with tax deducted at either 10% or 15%."

Mr Stainland said Perpetual was writing to unitholders to clarify their tax obligations with respect to the distribution.

"In the annual report for the year ended March 31, 2003, we stated that the distribution will be paid less resident withholding tax if applicable.' Subsequently, for those subject to the resident withholding tax regime, the applicable amount of tax was not deducted."

Perpetual restated a basic point of tax law.

"You are required, under the tax law, to file an income tax return for each year in which you receive a taxable distribution from the fund (whether or not tax has been deducted).

"In your return you are required to declare the taxable distribution and account for tax at the time of distribution against their tax liabilities. This amount has instead already been paid to you."

It was "important" for unitholders and the fund that the former complied with tax obligations regarding the distribution.

Perpetual had received "a number of queries from unitholders on this issue" and trusted the letter cleared up any confusion that had arisen. In essence, tax was supposed to have been deducted from the payment before distribution but that failed to happen.

Fair enough; everyone makes mistakes.

Some unitholders' eyebrows might have shot up to less dizzy heights if Perpetual's letter had a slight apology for the non-deduction and for "any confusion" that arose.

Tax can be a complex matter (although deducting withholding tax is simple), as shown in cases that get to the highest courts. Inland Revenue wins some, taxpayers win some.

It was reported recently Bank of New Zealand's fund managers had used incorrect tax values for some funds.

The amount involved was relatively small, being about 1.7% of the total investment, but affected investors' positions in the funds.

Mistakes, minor and horrendous, have been a fact of life in business and public administration for years and will continue as along as humans run systems, including computers. Everyone has heard the mantra "computer error" to explain some foul-up in accounts and general financial data.

Some years ago someone advised The National Business Review to read carefully the accounts included in the Reserve Bank's annual report.

It took some time before the secret emerged: there was an error in the balance sheet (as the statement of financial position was then known) so that one side was totalled incorrectly and could not balance.

There was no shattering effects on public confidence in the overseers of the banking system, merely a realisation that even gurus can stumble.

Investors are usually concerned about the big errors and actions that fall over the boundary between errors and fraud.

We saw many examples of both classes in several countries over the past two years.

They were neither minor nor amusing.

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