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Russell Group Considers Changes To Investment Tax


The government today released its discussion document on the proposed changes to the investment tax.

The proposed changes are the culmination of a series of reviews designed to resolve inconsistencies in the current tax rules and the distorting effect they have on investment decision making.

Three key objectives were set out in the terms of reference for the most recent review, completed in 2004 by Craig Stobo were:

To improve the efficiency and fairness of savings taxation and to reduce impediments to the ability of ordinary NZers to save for their retirement.

To minimise distortions to the way NZers invest.

To resolve inconsistency in the tax law, particularly with regard to direct vs indirect investments.

Russell’s Analysis:

• The Government’s proposals fail to meet any of these objectives.

• They increase tax impediments to retirement savings, because increased taxes are imposed on offshore investment e.g. For a 40 year old investor saving for retirement at 65, Russell estimates that the tax increase on offshore investments will result in a benefit reduction of about 13% for a typical scheme.

• The budget proposals will cure some of the distortions caused by the current rules, but create other larger ones. The current regime creates a bias against ‘black list’ countries which account for 18% of the world equities. The new rules create a bias toward NZ, which accounts for only 0.1% of the world markets. Thus the proposed changes would replace a bias against 18% of the world’s equities by a bias against 99.9 %.

• Instead of resolving inconsistencies in the taxation of direct vs indirect investments, the proposed changes will create a number of new inconsistencies. For example, suppose an NZ company trades domestic shares actively. The capital gains will be taxable – the new rules do not effect this. An investor in the company would therefore be taxed on domestic equity capital gains but if the investor shared in the same active trading through a qualifying Collective Investment Vehicle, the capital gains would be tax exempt.

• Neither investors nor the Government would benefit from the changes. Investors will face increased taxation on offshore investment and will distort their investment choices to avoid this. The Government will have to deal with a new larger crop of distortions in the tax laws, and will likely collect no more tax as investors rearrange their affairs to deal with the new tax.

• The discussion document also sets out proposals for income to flow through to the investor, with tax deducted at the investors' own marginal tax rates, instead of the current flat 33%. Russell agrees with this concept, however the discussion document does not deal with the separation of wholesale and retail funds.

• For example, consider the case of a superannuation fund that invests into wholesale pooled funds that are themselves superannuation funds. Tax is paid by the wholesale funds and tax paid income is distributed to the retail funds. However the wholesale funds have no direct relationship with individual investors, and have no way of charging tax at investor’s marginal rates. Without recognising the distinction between wholesale and retail funds, in making new rules for passing pre- tax income from the wholesale to the retail funds, the proposed flow-through rules could not be implemented without a major disruption that would affect the majority of superannuation funds in NZ.


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