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Budget tax amendment unconstitutional

CHAPMAN TRIPP MEDIA RELEASE
18 MAY 2007

Budget tax amendment unconstitutional

A tax amendment buried deep in the budget materials is perhaps the most unconstitutional tax proposal the Government has dared to advance in decades, according to Chapman Tripp partner and New Zealand Law Society Tax Committee convenor Casey Plunket.

Mr Plunket says that the reason for the amendment is the Government's own 5% Fair Dividend Rate method for taxing the income from foreign share investments.

“Last year, the Government proposed taxing 85% of the capital gain on such investments. This met with fierce resistance from the public, and the Government was forced to back down, on a number of fronts. First, GPG and certain other companies were exempted from the proposal altogether. Then the FDR method, which taxes investors on deemed income equal to 5% of the value of their investments each year, was developed by the Finance and Expenditure Committee, and hailed as a compromise approach,” he explains.

However, according to Mr Plunket, the Government now perceives the FDR method as creating unacceptable fiscal risk, and intends reneging on its side of the bargain.

The amendment would allow the Commissioner to deny taxpayers the ability to use the FDR method with respect to any identified share investments, without having to give any reasons for doing so. Taxpayers would then pay tax on 100% of the annual increase in value of their investment. In other words, they would be subject to a full capital gains tax, on unrealized as well as realized gains.

Mr Plunket says that the amendment is unacceptable on a number of fronts.

“Firstly, the imposition of tax is for Parliament, not the Commissioner. The Commissioner is only the collector. The proposed amendment allows the Commissioner to decide how much tax a person should pay, with no guidance or restraint on his power.

In addition, the amendment violates the compromise position which the private sector and the Finance and Expenditure Committee agonized over last year and which Parliament deliberately enacted,” he says.

Mr Plunket believes that the uncertainty created by the amendment will inhibit economically desirable offshore investment.

“The Commissioner's power to deny the FDR method must be subject to principles which are expressed in the legislation, and which taxpayers and the courts can use to determine whether the power has been used in the way intended by Parliament. Otherwise, the taxation of foreign share investments has to be totally revisited,” says Mr Plunket.


ENDS

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