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AUT tax loophole could be changed within weeks

Michael Cullen's tax adviser confirms the AUT tax hole is likely to be closed very soon.

Tuesday, March 9th 2004, 6:00AM

by Rob Hosking

The tax adviser for Finance Minister Michael Cullen has confirmed changes to tax laws around Australian unit trusts (AUTs) could be closed much more quickly than many people in the industry had expected.

Helen McKenzie told Good Returns yesterday the necessary changes to plug the gap could be included in the next tax bill, which would be introduced either later this month or in April.

When Cullen announced last year that he wanted to move against AUTs because they were eroding the government’s tax base, there was an expectation the changes were 18 months to 2 years away.

For instance at that time St Laurence Group chief executive Kevin Podmore suggested that the announcement meant that the window of opportunity for tax-effective AUTs had shrunk from 30 months to 18.

The financial services industry has been pressing for the issue of the AUT tax gap to be dealt with as part of a broader reform of investment tax law, which now looks headed for some form of the ‘risk free rate of return’ (RFRM) model advocated in the McLeod Tax Review.

“But it’s now been taken out of that wider RFRM process,” McKenzie says.

That will mean that the AUT solution will be an interim one.

Just when any changes may take effect has yet to be decided, she says. The long period since the government first became aware of the hole, and the fact that Cullen first publicly spoke of the gap six months ago, has led to growing speculation that changes will be made retrospectively.

While there would be an outcry from the fund managers, and from the legal fraternity, this would not cut much ice with voters. If National stood up for the industry it would help Labour paint the Don Brash-led party as friends of the rich – something Labour is trying very hard to do.

Cullen said, in a speech last week, that the leakage is increasing.

At the time the hole was discovered, an internal Treasury e-mail warned that New Zealand-based fund managers are running virtually everything through Australian unit trusts and that, if not plugged, “the hole could result in us having no income base”.

That same e-mail urged that “we need something simple, and easy to use that won’t cost a bucket like RFRM that won't be as unpalatable as the current [system].”

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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