Media statement
For immediate release
Tuesday, 31 October 2006

Dunne corrects misleading statements on overseas investment

Revenue Minister Peter Dunne is concerned that New Zealand investors may have been misled by a recent news release from accountancy firm Ernst & Young on the proposed method of taxing income from overseas investments under the 'fair dividend rate' method, known as the FDR method.

"There are significant errors in the release that are unhelpful in assisting the national debate on how to tax such investment in a fair and equitable way," he said.

"For example, the E&Y release ignores the fact that deemed income can be less than 5% under FDR.

"The release states in para 4:

“The latest proposals would see individual investors in most cases being taxed on 5% of the market value of their portfolio shares at the beginning of the year, regardless of what they actually earn on their offshore portfolio shares.”

"They further state in para 5 that the result:

“…is taxation on notional gains, not actual gains.”

Mr Dunne said, "These quotes are misleading. They give the clear impression that investors will be taxed on a flat 5% return – regardless of how their shares performed.

"In fact, if investors can show that their total return on their offshore shares is less than 5%, they will be taxed on this lower amount. No tax payable would be payable if the total return was negative.

"The news release also overstates potential cashflow difficulties.

"It states that:

“…because the gains are not realised then cash flow difficulties could be faced when having to pay the actual tax.”

Mr Dunne commented, "This is not the full story.

"Deemed income under FDR is a maximum of 5% of the investment’s value. Tax on 5% (for an investor on the top 39% rate) is 1.95%.

"This means investors only need an average dividend yield of 2% to meet the tax. Average dividend yields on international shares are about 2-3% - i.e. enough to cover tax under a FDR.

In addition, if the actual return on investors’ offshore shares is less than 5% the tax under FDR would be lower. In this case average dividend yields will easily exceed the tax liability."

Mr Dunne said he was pleased Ernst & Young cared enough about the issue to contribute to the debate, but a fruitful discussion was only possible if all the facts were made known.

ENDS

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