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“The PIE” and other Investment Income Tax Changes

17 May 2006

“The PIE” and other Investment Income Tax Changes Introduced

The Tax Bill containing the proposed changes to the taxation of investment income was introduced into Parliament today.

The changes in the Bill are broadly in line with the proposals announced on 11 April 2006 by the Ministers of Finance and Revenue, according to Matthew Hanley, Ernst & Young Tax Partner.

The domestic changes seek to have the income of particular investment entities - to be called “Portfolio Investment Entities” (PIEs) - taxed at the tax rates of the investors in the PIEs.

The PIEs will be taxable on income using a blended tax rate of their investors which will be allocated among investors to achieve a rate of 19.5% for those with incomes up to $48,000 and 33% for those with incomes over $48,000.

Mr Hanley says this approach should provide the promised neutrality where the managers of the PIEs can allocate this tax back to investors.

“The Bill contains details, unknown until now, about how the PIEs will operate which now enables the required implementation work of PIE managers and their registry providers to proceed.

“There are some modifications to the expected bad news for offshore investors, both bad and good,” he says.

“Listed Australian Unit Trusts will be excluded from the listed Australian exemption for both PIEs and direct investors. This is disappointing given the requirement for Australian unit trusts to distribute all income and realised capital gains each year. This means that New Zealand already collects its required “earnings” tax. This exclusion will impact on many direct individual investors and I encourage submissions on this point.

“There will be an exclusion from the proposed new offshore investment rules where 100 or fewer New Zealanders collectively own 10% or more of a “grey list” foreign company. This may provide some relief for those owning employee shares, for those who take shares when they sell businesses to offshore parties and those migrating offshore to raise finance. There should be a specific exemption for employee shares and again, I encourage submissions on this point.

Mr Hanley observes there has been no change to the 85% mark to market basis for taxing offshore portfolio share investments which, in his view, is an overstated proxy for the “current year earnings” the Government says it wishes to tax.


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