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Fairer rules on taxing investment income

28 June 2005

Fairer rules on taxing investment income

A government discussion document released today outlines proposals for fairer, more consistent rules on taxing income from collective funds and offshore portfolio share investments.

“Radical change in the tax treatment of different kinds of investment income is long overdue,” Revenue Minister Michael Cullen said today. “As noted in Budget 2005, the current rules tend to overtax investors – particularly those who have lower tax rates, advantage certain forms of offshore investment, and favour investment in some countries over investment in others.

“The discussion document seeks feedback on changes to reduce inconsistencies, remove disincentives for domestic investment through managed funds, and reduce the differences in how income from offshore shares is taxed.

“The changes complement the new KiwiSaver announced in Budget 2005, which has been designed to encourage New Zealanders to save through work-based savings schemes. It is therefore vital that their investments are taxed consistently and fairly,” Dr Cullen said.

Key proposals include:

Domestic investment through collective investment vehicles (CIVs) Collective investment vehicles – widely held unit trusts, registered superannuation schemes, group investment funds and other pooled investment vehicles – can choose to use the new tax rules.

Investors’ taxable income earned through a CIV will generally exclude realised domestic share gains. Under the new rules, investors will generally be taxed at their correct rate, instead of a flat 33%. CIVs will deduct tax at rates notified to them by individual investors. Tax losses can be carried forward and used to offset assessable income in future years or allocated to investors’ accounts.

Tax credits such as imputation credits will be available to offset tax on assessable income derived via the CIV. Portfolio investment into foreign shares The “grey list”, which allows for concessionary tax treatment of investments into seven countries, will be removed for portfolio investment – offshore investment in shares where the investor owns 10 per cent or less of the foreign entity invested into. CIVs and other investors that are not individuals will use the change in an asset’s value over the tax year to calculate assessable income.

Individual investors will also base their assessable income on an asset’s change in value over the tax year, but tax paid will generally be spread over several years to reflect cashflow. Assessable income on assets that do not have a readily verifiable market value will be calculated under a simplified deemed rate of return method. The new rules will not apply to individuals’ investments under $50,000 into foreign companies that are listed in a country with which New Zealand has a double tax agreement.

The discussion document is published at www.taxpolicy.ird.govt.nz. Submissions on the proposals close on 30 September.

ENDS

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