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Russell Investment Group Budget Commentary

Russell Investment Group Budget Commentary


* The government has proposed a new taxation regime for investments.

Two changes in law scheduled to take effect 1 April 2007:

* Eliminate the tax on capital gains from NZ shares held in a pooled fund.

* Apply a voluntary 'flow-through' regime to all pooled funds in New Zealand so investors pay tax on income at their own tax rate.

In addition, the Government has floated some ideas regarding tax on offshore shares:

* Scrap the Grey List tax exemption. The Grey List is a list of seven countries where New Zealand investors receive preferential tax treatment.

* Tax the returns on offshore shares based on changes in their value.

What will be their likely effects? Based on the detail provided so far:

* The overall tax that most investors pay on the total returns from NZ shares will be quite low.

* After-tax returns on former Grey List shares will be considerably smaller, and all overseas share investments will have some or all of their capital gains taxed.

* The tax system will bias investors away from offshore shares toward NZ shares.

* Tax-exempt institutions will enjoy a greater range of fund choice.

* Lower rate taxpayers who invest in pooled funds will be better off.

Are these effects good?

* The expected shift of share investments toward New Zealand would reduce the spread of investments, increasing risk.

* It could also flood the domestic share market, leading to distortions in share prices.

* With respect to the objectives of the Stobo review, these changes address some 'problems' but create some others:

* The abolition of the Grey List removes any geographic biases in offshore share investing but NZers investing in offshore shares will pay more tax.

* The tax treatment of capital gains on NZ shares in actively managed pooled funds will be at odds with that of actively managed direct investments.

* Capital gains from NZ shares will be tax-free for most investors, but some or all of the capital gains from offshore shares will be taxed.

* Former tax exemptions for pooled funds domiciled in Grey List countries will be eliminated, even for those that do not invest in shares.

About Russell Investment Group:

The Russell Investment Group, a global investment services firm, provides multi-manager investment products and services in more than 35 countries and has been researching investment managers for more than 30 years. Worldwide, Russell manages over NZ$149 billion in assets and advises clients representing approximately NZ$3 trillion. In New Zealand, Russell advises on more than NZ$14 billion in assets and invests around NZ$1.0 billion for NZ investors in Russell Funds. Further information about Russell Investment Group NZ can be found at:

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