Officials finally put number on AUT tax leakage
Officials calculate the government will gain between $25million and $35 million a year from measures to plug the Australian unit trusts tax “loophole”.
Friday, June 4th 2004, 6:27AM
by Rob Hosking
Inland Revenue and Treasury officials raised the issue with Cullen last year, suggesting there has been massive tax leakage around this type of investment.
The problem has been, form a tax point of view, which New Zealanders can invest in offshore unit trusts that distribute their earnings by way of a bonus issue of new units. If the investor agrees that those new units be reinvested rather than distributed in cash, which means the new issue is not taxed.
“The amounts which vest absolutely in the beneficiary are economically equivalent to a dividend and should, therefore be treated equally,” tax officials argued in a Cabinet paper.
Australian tax rules applying to unit trusts mean that if that trust earns income outside Australia, and a non-Australian investor is beneficiary of that income, the income is not taxed.
So if a New Zealand investor puts money in an Australian unit trust which then earns money from outside Australia – the example has been given that it invests in New Zealand government stock – the income is not taxed in Australia either.
A joint Treasury/Inland Revenue paper which went to Cabinet in April cites data from an unnamed “industry research body” which calculates that about $3 billion is investing in Australian unit trusts which do not make cash distributions.
“Of this, approximately $150 million appears to be invested in New Zealand government stock. The problem is therefore significant and should be addressed…A conservative estimate of the tax revenue that can be expected to be gained [from the law change] is $25-35 million per annum. This estimate assumes that around half the capital affected is reinvested in vehicles that also reduce New Zealand and Australian tax, such as Untied Kingdom investment trusts.”
The estimate is, officials concede “very rough”.
The industry has criticised the law change that has been put to the select committee.
Investment Savings and Insurance Association chief executive Vance Arkinstall has said the change will affect virtually all Australian unit trusts, not just the problem ones. The Cabinet paper notes this criticism – “many interested parties consider that any proposal should target only New Zealand sourced debt investments.”
However no answer to the criticism was put forward.
The industry has also criticised the way the problem has been characterised as a loophole, saying it is more of an anomaly in the tax law.
The industry actually raised the anomaly with officials some years ago, but at the time there was little official interest.
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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