Tax: The Good, the Bad and the Ugly
There will be three big tax areas this year, PricewaterhouseCoopers tax partner Paul Mersi says. Solutions will be found to some structural problems affecting certain savings vehicles, there will be cost increases through gst measures, and a likely continuation of the uncertainty surrounding the tax treatment of savings in the long term.
Monday, January 28th 2002, 12:23PM
by Paul Mersi
Solutions to some structural problems
As a result of a concerted effort by both the Investment Savings and Insurance Association and Inland Revenue Department’s policy directorate, good progress was made last year on providing solutions to some potentially serious difficulties arising out of the application of a company tax regime to pooled investment vehicles such as unit trusts and certain group investment funds (gifs).
These solutions will, from this year, see a more appropriate set of ownership continuity rules applying in relation to imputation credit retention, and in addition, facilitation of expense transfers (previously applicable only to superannuation funds) which reduces the possibility of wasted imputation credits being generated when one unit trust/gif invests in another.
Importantly, late last year the Government introduced legislation to neutralise the potentially detrimental impact on imputation credit balances that can arise through the normal course of investor redemptions. This will reduce the risk of fully taxable unit trusts and gifs finding themselves with insufficient imputation credit balances to fully protect distributions to unitholders - particularly in the course of their winding up.
This is a welcome, innovative solution to a difficult and insidious problem.
Gst–led cost increases
Not so welcome are the current and future changes to gst. The resolution of years of uncertainty with respect to the gst status of funds management and administration fees has resulted in a broad-based agreement that 10% of such fees will be subject to gst from the beginning of this year (with the remaining 90% being exempt). This will create an absolute cost increase for virtually all funds (or their managers/administrators depending on the extent to which fees are adjusted).
Further gst-induced costs to fund managers loom as the so-called ‘reverse charge mechanism’ mooted last year makes its inexorable journey into the Tax Act in the next few months.
This mechanism will impose (largely unrelieved) gst on New Zealand funds and managers in respect of any fees for non-financial services provided from outside New Zealand (probably with effect from 2004).
While the policy rationale underpinning this regime is understandable, its introduction will result in a simple increase in the cost of foreign-sourced services – especially detrimental to fund managers who have no choice but to source support and other services from their foreign-based affiliates.
Finally in relation to gst, a discussion document is likely later this year which will suggest refinements to the long-suffering definition of "financial services" - thus altering to a degree the scope of the exemption from gst.
We may well see fund management and administration fees becoming fully subject to gst, and the exempt status of trustee fees and superannuation fund fees generally coming under serious threat.
Fundamentals of taxing investment vehicles and savings
The debate continues with respect to the Government’s intentions in this regard with Finance Minister Cullen continuing to express interest in options aimed at being more ‘savings friendly’ – despite incentives being an anathema to Treasury.
The current preference seems to be for an up-front incentive (income from which contributions are funded to be taxed at a reduced rate, i.e., a tTE regime).
It seems that there is a will to introduce such a regime (at least for superannuation) but we will have to wait a little longer as the Government has said that it cannot afford it this year.
Tough luck though for anyone saving for their retirement through other means.
The perennial issues of capital gains tax and the tax disincentives for individuals to invest through pooled vehicles (rather than directly themselves) don’t seem any closer to resolution, although we did get clearer signals last year from politicians that capital gains is simply not on the agenda as the political cost is perceived as being too high.
The McLeod Tax Review reported its ideas on the tax system last year. It took a more fundamentalist approach towards its analysis than previous reviews, with its influence thus likely to be felt more in the long-term than in the short-term.
While the work undertaken by McLeod might have been seen by some to be an injection of fresh air into the debate on the tax system, the media reaction indicated something more resembling Orc-breath.
The report at least made us realise that taxing owner-occupiers was likely to be less popular than taxing charities.
Now that the dust has settled, though, the McLeod Tax Review’s short-term impact is likely to be in areas where it addressed some of the more mundane tax issues – such as the taxation of international investments. Reform in this area is well overdue but one has to doubt that the risk-free return method favoured by the McLeod Review will ultimately find support – at least as a complete solution.
Business compliance costs
Last year the Government signalled its desire to address high compliance costs for business through its tax-focused ‘More Time for Business’ discussion document and the work of the Ministerial Panel on Business Compliance Costs.
While there no doubt will be some marginal improvements as a result of these exercises (some have already been introduced), from a tax perspective both exercises have been significantly handicapped in what they can achieve by some fundamental and unchanging aspects of our tax system: multiple tax rates, increasing reliance on businesses and individuals assessing themselves (perfectly), and minimal tolerance for error or inaccuracy in the application of the tax system (no matter how insignificant the revenue consequences).
There seems little hope of any real change in these features in the foreseeable future and thus the scope for any material reduction in the onerous costs on business of complying with tax requirements will remain severely limited.
Paul Mersi is a tax partner specialising in financial services at PricewaterhouseCoopers.
Paul Mersi is PricewaterhouseCoopers Tax Partner and Head of Financial Services
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