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Dunne: ASFONZ National Conference

Hon Peter Dunne
Minister of Revenue
Speech to ASFONZ National Conference
Sky City convention centre
Embargoed to noon, Tuesday 10 October 2006

I’m very pleased to have been invited to speak to your conference today on the tax side of a number of issues affecting the superannuation fund industry.

The title of this section of the conference, I see, is “Tax – it never sleeps”, a sentiment with which many of us here today undoubtedly agree.

To extend the metaphor, I think it’s fair to say this has been a particularly wakeful year for tax policy in relation to savings, investment and superannuation.

The tax treatment of savings and investment income is of vital importance to the success of plans to increase the overall rate of domestic savings and encourage people to save for retirement.

I think we all agree with those objectives, which underlie many of the changes that are affecting your industry – whether through the recently enacted KiwiSaver scheme or through the taxation bill currently before Parliament.

It is essential to achieve an even-handed tax treatment of income from the various ways of saving and investing, so that tax is not the deciding factor in making decisions about how to save or invest.

Several people have already spoken at this conference on the merits of the recently enacted KiwiSaver scheme, which I think can be regarded as the flagship of the savings reform.

KiwiSaver has the potential to improve New Zealanders’ long-term saving habits and improve their financial security in retirement.

One of its main attractions is that it will make saving easier by making it necessary for new employees to opt out rather than opt in. Saving becomes easier when it is the “default option”.

By making employer contributions to KiwiSaver tax-free up to a certain amount we are also making it more attractive to employees – and to their employers.

The proposed tax rules on portfolio investment entities – or PIEs – in the taxation bill currently before Parliament are driven by the desire to remove tax biases, as far as possible, from investment decisions.

That bill attempts to put the tax treatment of different types of share investment on an equal footing, introducing greater fairness and reducing distortions in investment decisions.

Once enacted, the new legislation will remove several tax disadvantages that discourage saving through funds.

The new tax rules will have the potential to change the landscape significantly for managed funds in New Zealand.

A portfolio investment entity will, in many situations, become the favoured vehicle for people to invest through.

Ideally, this brave new world would be achieved with a minimum of complexity.

However, as always, there are a number of constraints that we have had to work with when designing the PIE tax rules. They include:

- How to tax savers at their correct tax rate while not requiring investors to file tax returns.

- How to deal with savers who leave the fund part-way through the year.

- And how to define accurately what a managed fund is.

While these constraints have inevitably resulted in complex rules, I hope that various types of managed funds – from unit trusts to employer-based superannuation schemes – will be able to use the PIE tax rules and, indeed, will want to use them.

The key to achieving that is to ensure there is sufficient flexibility for different types of funds to calculate their tax under the PIE rules.

In other words, the rules should recognise that the way a unit trust will want to calculate its PIE tax is likely to be different from the way a non-unitised, employer-based superannuation scheme will want to do it.

I am very hopeful that the final form of the PIE rules that are passed by Parliament will provide this flexibility.

I also am very aware of the pressure that the savings industry is under in gearing up for all the changes.

You are being asked to change your systems in a very short period of time. Indeed, sometimes you may have to start work before there is absolute certainty on what the final rules will look like.

This is clearly not ideal. It has been caused by a number of things – including an ambitious timeline and enormous focus having been put on the controversial changes to the proposed offshore tax rules.

The delayed implementation of the PIE rules until 1 October is in recognition of this time pressure and, while the deadline is still tight, I hope it will make application of the new PIE tax rules possible.

The Minister of Finance and I announced last month that we were writing to the chairman of the Finance and Expenditure Committee outlining a suggested solution to problems raised in submissions on the offshore investment tax changes proposed in the bill.

In response to concerns, we have suggested a “fair dividend rate” approach to calculating tax on income from offshore shares, to replace the method proposed in the bill.

It would tax individual investors on a maximum of 5 percent of the market value of their offshore shares at the beginning of the year, with returns of less than 5 percent attracting proportionately less tax.

The fair dividend rate approach would not target capital gains but, rather, something approximating a reasonable dividend yield.

We believe the 5 percent rate, though higher than some have suggested, is a realistic rate based on historic returns on equity investments – offshore shares having yielded in excess of 9 percent, on average, over the last 20 years.

The basis of our decision to suggest adoption of the fair dividend rate is as follows.

The tax rate on income from offshore shares earned by managed funds on behalf of their 39 percent rate investors is capped at 33 percent. In contrast, income from offshore shares earned by individuals investing directly in them is not capped at 33 percent and can be subject to a 39 percent tax rate.

Some people have also conveniently forgotten that the cornerstone of the investment tax proposals is that low-income earners will now be taxed at their personal marginal tax rate, making an investment in a managed fund unambiguously more attractive.

Managed funds also have a complete exemption from income tax on their Australasian share gains, regardless of how often they trade. Individuals who regularly trade in Australasian shares will be deemed to be traders and taxed on all their share gains.

Funds have an additional advantage over individuals in that the proposed exemption from SSCWT for employer contributions to KiwiSaver funds would make investing in funds particularly attractive.

There is no equivalent tax concession for individuals who invest directly.

Overall, the funds’ tax position will be highly competitive with other ways of investing that are available to individuals.

The whole issue of the fair dividend rate is likely to be a key one for the Finance and Expenditure Committee and one that the Committee will no doubt consider carefully.

What happens to the proposed legislation at this stage is in the hands of the Committee, and not up to Ministers.

We of course would like to see as much consultation as possible on suggested changes to the proposals in the bill – keeping in mind however, the constraints imposed by the need for the bill to be reported back to Parliament by 24 November, without leave of the House to report later, and for the legislation to be enacted by 1 April next year.

To conclude my remarks today, we are working hard to achieve flexibility and neutrality in the tax treatment of investment income.

I am sympathetic to the pressures your industry faces in preparation for the implementation of the PIE rules, and we are also working hard to make the transition as smooth as possible.

There will be criticisms of details of the package, yes, and some later fine-tuning will probably be required.

It is very important, however, not to lose sight of the larger picture and the aims of the wider tax reforms – which include achieving a reasonable balance in taxing income from different types of investment, so that tax is not the deciding factor in how New Zealanders choose to save.


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