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Winners & Losers in Investment Tax Reforms

11 April 2006

Winners & Losers in Investment Tax Reforms

The latest instalment on the Taxation of Investment income reforms announced today by the Joint Ministers “is certainly a move in the right direction, having responded to submissions on the proposals,”says Ernst & Young Tax Director Matthew Hanley. The reforms will apply from 1 April 2007.

“Overall there will be winners of losers from these proposed reforms,” he says.

The Winners: Onshore Investors

Mr Hanley says the domestic component of the reforms is “a triumph for tax neutrality.”

“The broad principle is that income of qualifying collective investment vehicles will be taxed at the marginal tax rate of investors. This will apply to all income of these vehicles including dividends, interest and rental income.

“An effect of the Ministers’ announcement today is that listed property trusts and companies can be “qualifying collective investment vehicle” where they satisfy required criteria.

Mr Hanley believes the Ministers have responded proactively today to the plight of funds managers and trustees where there are investors on different marginal tax rates investing in particular collective investment vehicles.

“The good news is that for those on the 39% tax rate, the tax on this income will be capped at 33%. This is a significant compromise no doubt in the spirit of encouraging saving,”he says.

The good news continues. Losses and tax credits of qualifying collective investment vehicles will flow to investors after 1 April 2007 and will be paid out in cash to investors by Inland Revenue.

The initial proposals in the 28 June 2005 Discussion Document on these reforms included providing a tax exemption for gains on New Zealand shares made by these qualifying collective investment vehicles. The Ministers announced today this exemption will be extended to listed Australian companies.

The Losers: Offshore Investors

The expected bad news in relation to offshore portfolios equity has been tempered slightly in the Ministers’ announcement today. The current “grey list” exemptions will be removed other than for investments in listed Australian shares.

“It is disappointing this Australian exemption is not broader to cover unlisted Australian companies and unit trusts. There will be investors holding employee shares in unlisted Australian companies this could affect,” says Mr Hanley.

Other offshore portfolio equity investments will be taxable at 85% of the charge in market value (referred to as the comparative value approach).

“This 85% basis is a reduction from the original 100% and is an effort to address the significant concerns submitted to the Ministers that the 100% basis is an inaccurate proxy for earnings from offshore portfolio equity investments. Even at 85%, this is still an overstated earnings proxy.”

As originally announced, there is a timing concession for individual investors in offshore portfolio equity. The Ministers today announced the tax individual investors pay will be capped in any given year at 5% of the value of investments (down from the original 6%).

“There will be winners and losers from this reform. It is encouraging from the Ministers’ announcement today they have listened to the concerns raised and hopefully will continue to do so as the legislation required to enact these reforms progresses through Parliament when the legislation is introduced in May.”


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