Major tax changes looming

The advantages that many of the tax-effective investment vehicles currently enjoy may be lost soon, if Finance Minister Michael Cullen proceeds with plans to adopt one of the key ideas in last year's McLeod tax review.

Cullen signalled, in a low key speech to the Probus Club in Auckland on Friday, that he is keen on adopting the risk-free rate of return (RFRM) model for taxing investments.

"I am interested in this idea because it has the potential to make the relevant tax rules simpler, fairer and more effective," he said.

Under RFRM model investments would be taxed at the so-called risk free rate of return. For example if the rate was set at 4% an investor would pay tax on the return of 4% regardless of what happened to the investment.

The chair of the tax review, Rob McLeod, told Good Returns yesterday that if the government does adopt the RFRM model then investments such as passive funds and United Kingdom based Open-Ended Investment Companies, (OEICs) could lose their tax advantages.

"The biggest concern from the Government's point of view on tax design is the myriad messy treatment (of foreign investments) and the fact that results in the tax driving of the form and extent of investment," he says.

"I think (RFRM) has the potential to iron out a lot of the creases."

McLeod says that the review told the Government it should experiment with the RFRM idea.

"(Michael Cullen) should experiment," he says. "In other words evolve into it. Don't revolve or revolt into it. Just pick off a couple of troublesome ideas."

McLeod says that his "instinctive judgement" is that RFRM may be seen as a tax advantage as investors have to pay less of their returns to the Government in the form of tax.

He believes RFRM may help improve the level and quality of New Zealanders' savings.

Cullen hopes to be in a position to set out in some detail the likely direction the government will take on these issues in the upcoming budget that is scheduled for May 23.

Editorial: A new idea at last

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