Tax credits don’t add up

The tax credit option is not all it’s cracked up to be, and may not be widely adopted by the savings industry, Prudential tax manager Andrew Schmidt says.

Friday, May 1st 1998, 12:00AM

The tax credit option is not all it’s cracked up to be, and may not be widely adopted by the savings industry, Prudential tax manager Andrew Schmidt says.

The scheme, designed to close the 12 cent differential between the lowest marginal tax rate and the rate paid by many investment funds, isn’t the panacea the Government has made it out to be, Schmidt told the Society of Independent Financial Advisers conference in Wellington.

He says it may be particularly difficult to implement for insurance bonds and whole of life and endowment policies, and there were problems introducing it into superannuation funds, unbundled savings products and annuities.

Figures bandied around the industry suggest it may cost $180 million to set up the scheme and it will cost the industry (and investors ultimately) $60 million a year to run. On top of that Treasury will lose $30 million of revenue a year.

“It just doesn’t add up,” Schmidt says.

There are also huge technical issues to be overcome, and in some cases the credits may not materialise for some investors who elect to use the option, if their fund manager provides it.

“Some schemes aren’t going to have tax credits for years.” Schmidt predicts some managers will be able to offer the option effectively and use it as a marketing tool, while for others it just won‘t stack up.

Managers will have to do a cost benefit analysis to ensure it is worth adopting, and advisers will have to play a role keeping them honest and making sure the costs of the scheme are only borne by investors who benefit from it.

He says one solution to the problem is for investors to use unit trusts which aren’t hit by this tax problem.

The Investment Savings and Insurance Association’s preferred solution to the tax differential problem was for funds to use a reduced proxy tax rate of 27 per cent, which halfway between the 21 per cent personal rate and the 33 per cent fund rate.

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