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Fundamental Threat to Taxpayers may Slide Through

30 October 2006

Fundamental Threat to Taxpayers may Slide Through

Serious concerns are being raised over the latest proposals to tax offshore investment shares using the ‘fair dividend rate of return,’ released on Friday.

Ernst & Young Tax Directors Jo Doolan and Geof Nightingale say all Kiwi taxpayers – whether or not they have offshore investments – should be paying close attention to these proposals and the implications if they are rushed through.

“It’s like an inheritance tax while you’re still breathing,” says Jo Doolan. “Implicitly you will be taxed on part of the capital gains. It’s a complete leap from any system of taxation that currently exists in New Zealand. The proposals represent a fundamental change to our whole basis of taxation. If this goes through, what’s to stop the government applying the same method of tax to the housing market and domestic investments?”

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. Portfolio shares are where an equity investment of less than 10% is held in foreign companies. For those who cannot determine a market value then a cost based variant is available. Each year the cost base is increased by 5% and dividends received are not subtracted from the cost base.

The result, say Geof Nightingale and Jo Doolan, is taxation on notional gains, not actual gains. Further, they point out that because the gains are not realised then cash flow difficulties could be faced when having to pay the actual tax.

“On the face of it the latest proposals appear to be a workable compromise on the previous proposals. But with smooth words, the government is actually trying to slide through something that represents a fundamental change to the whole basis of New Zealand’s taxation,” says Jo Doolan.

“Of equal concern is the speed with which this new proposal is being pushed through and with limited consultation,”Geof Nightingale says. “It’s a big risk to take for the Government. Particularly, as the proposals remain complex in compliance terms and will still leave distortions between investing directly and via managed funds.

These fair dividend rate of return proposals have the support of the Minister of Finance and the Minister of Revenue, but the Finance and Expenditure Committee are asking a selected group for further input before giving it their approval. This select group includes the Institute of Chartered Accountants and the Law Society. Taxpayers can still have their say if they oppose this form of taxation and its implications.

Write to your local MP and copy the Finance and Expenditure Committee by 9 November 2006.


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