$110 million of tax cuts to improve fairness of investment tax regime

"We want a system that doesn't encourage investors to favour investing overseas over investing in New Zealand.

"We are removing distortions which favour sophisticated direct investors over those who choose to invest through managed funds and unit trusts," the two Ministers said.

"This is no money grab by the government. In fact it will cost about $110 million a year in foregone tax revenue. But if we are to improve the savings culture in this country the government considers this to be a valuable investment to make," said the Ministers.

Their comments follow the release of changes to the investment tax regime.

"There has been extensive consultation following the Stobo Report. We have listened to the concerns of the investment community and we think we have the balance right now," they said.

"As always there will be winners and losers. The losers in this case will tend to be sophisticated direct investors who have enjoyed considerable tax advantages under the old regime and who have the ability to easily adjust their investment arrangements.

"The winners will be thousands of ordinary, hard working New Zealanders who the government is helping to achieve long term financial security."

The changes are in three areas:

1. The new rules will remove a number of tax disadvantages for investors using managed funds, many of whom are ordinary, middle-income savers.
   Lower-income savers investing in vehicles that adopt the new rules will in future be taxed at their correct tax rate. Currently, lower-income savers are taxed at 33% on their savings even though their correct rate may be 19.5%. This creates a significant tax disincentive for lower-income savers to use managed funds in order to have access to a diversified range of investments. Those whose tax rate is 39% will continue to have their savings taxed at 33%.


2. Capital gains on New Zealand and Australian shares held via a vehicle like a managed fund will no longer be taxed. This will increase the gains for those who choose to invest in these types of vehicles and offset the advantage of those who invest directly in NZ and Australian shares because they are only taxed on dividends. Both these measures put managed funds on an equal footing with direct investors. It is especially important for encouraging people to save through KiwiSaver.


3. Offshore investment. Currently, individuals who invest directly in one of the eight so-called “grey list” countries will generally pay tax only on dividends. The problem is that many companies in "grey list" countries pay very little by way of dividends so these investors are not paying a reasonable amount of tax.

This tax treatment advantages direct investors over other savers, such as ordinary lower and middle-income people who use a managed fund and who may lack the wealth, financial sophistication, and confidence to invest offshore directly. Managed funds are taxed on the funds' earnings.

The new rules will resolve the problem by requiring a reasonable level of tax to be paid by direct investors who have substantial share portfolios outside Australia. This is not a full capital gains tax. The amount of tax will be capped at 5% of the increase in value of the investment in any one year, not the full unrealised capital gain. The increase in value will be limited to only 85% of the actual increase in value.

The current rules are also too harsh for investment outside the grey list, discouraging investment in other important destinations such as many high growth Asian countries.

More

Taxation of investment income: Questions and answers

Fact sheet 1: Savers in New Zealand-managed funds

Fact sheet 2: Overseas share investments by individual direct investor

Fact sheet 3: New tax rules for New Zealand managed funds

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