Spotlight on “tax-free” investment products

Revenue Minister Michael Cullen today signalled that the government would move to prevent New Zealand investors using certain overseas funds to escape tax.

In a speech delivered by Associate Revenue Minister David Cunliffe on his behalf to the Institute of Chartered Accountants, Dr Cullen referred to Australian unit trusts that invest in New Zealand government stock and offer associated investment products that are claimed to be free of New Zealand income tax.

“An identical investment through a New Zealand vehicle would be clearly subject to New Zealand tax,” Dr Cullen said. “From the government’s perspective this is unacceptable and, if necessary, we will change the law to close the loophole.

“As a first step, an issues paper will be released in October for consultation on proposals to deal with this and other problems that arise under the foreign investment fund rules. One of the options canvassed will be a version of the McLeod Review’s risk-free rate of return method.

“The lesson of the last 40 years is that loopholes are not in anybody’s interest. They distort the flow of funds and, to the extent that they are effective in eroding the tax base, they simply increase the pressure on the tax rate in other parts of the system,” Dr Cullen said.

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