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Be careful with new tax rules

Thursday 22nd March 2007

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Investment portfolio construction under the new tax rules is going to be far more complex than it was previously and advisers will need to be careful, Brook Asset Management executive chairman Simon Botherway says.

Botherway warns advisers to be cautious and to follow the rules. His view is that some product providers will try to offer "smart" products which get around some of the new rules.

His view is that this is dangerous and smart product structuring may become subject to legislative amendments.

"Cutting edge interpretations (of the rules) are unwise when the legislation is untested."

Botherway also suggests because of the complexity of these new rules investors will be far better off to use collective investment vehicles and PIEs, rather than direct investments.

"There is a temptation for individuals to go alone," he says.

While there maybe some savings by using direct investments, these could be negated by things such as accountants' fees at tax return time. Also late tax payments are likely to face Inland Revenue use-of-money charges. By using qualifying managed funds an investor "will pay tax when it is due and when it should be paid."

While there are complications with the new rules there are also advantages as PIEs and other such vehicles have significant tax advantages to the present funds.

One of the big jobs for advisers is that asset allocation must now be re-assessed based on after tax returns for each investor and asset class.

The one area to be disadvantaged is New Zealand fixed interest.

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