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Select Committee Report on Tax Bill Disappoints

Tuesday 5 December 2006

Select Committee Report on Tax Bill Disappoints

PricewaterhouseCoopers financial services partner, Paul Mersi, said he was “disappointed” with the findings of today’s report on the tax bill from the Finance & Expenditure Select Committee to Parliament, and he suspected many taxpayers would be “grumpy”.

The report proposes revisions to the bill containing the Government’s proposed radical changes to the taxation of New Zealand managed funds and, more controversially, the taxation of offshore portfolio investments.

Mr Mersi said the bill should rightly be heralded as “going a long way to reduce long-standing distortions” in the tax treatment of investors in relation to share and unit trust investments.

He said: “While the change to the way New Zealand managed funds will be taxed is a hugely positive one that has been 20 years in the making, the proposed taxation of offshore portfolio investments is still too harsh. It is surprising and disappointing that the Select Committee did not go further in the changes it has proposed to the bill.”

For New Zealand managed funds, the bill will make the tax outcomes of New Zealanders investing in unit trusts and super funds (including KiwiSaver) more consistent with direct investment in shares. However, the proposed changes to the taxation treatment of offshore portfolio equity investments that were originally in the bill have generated more controversy than has been seen in this area for years.

The bill had originally proposed to tax investors on 85% of the unrealised market value movement of their offshore investments (with the only concession being GPG and most Australian-listed shares).

A record number of submissions were received and vehement opposition has seen the Select Committee propose changes to the bill which would result in New Zealand investors paying tax on an assumed income of 5% of the value of their investments each year (or the actual gain if lower in any year).

“We sensed a palpable and very strong consensus forming during the Select Committee hearings around a simple, flat rate of tax at around 3% - not the so-called ‘Fair Dividend Rate’ of 5% which the Select Committee has recommended in this report,” said Mr Mersi. “Experts who made submissions were unanimous that 5% was well above the actual dividend yield on international shares.”

He added: “We think taxpayers will be grumpy as many will perceive the 5% rate as simply being too high. Although taxes do not win popularity contests and are rarely borne out of consensus, there are concerns that if the rate is widely perceived as being too high it will almost certainly lead to ‘less-than-full’ compliance. This will then place significant pressure on Inland Revenue in terms of enforcement.

“It seems such a shame that the acceptability of this change could have been materially improved simply by pitching the rate a little lower and with relatively little cost to the Government. I think that in time this will be regretted as a missed opportunity.”


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