Reaction to Stobo report
NZX and Russell Investments give their take on the Stobo tax report.
Wednesday, November 17th 2004, 12:07AM
New Zealand Exchange: Chief executive Mark Weldon says that the recommendations of the Stobo Report "Towards Consensus on the Taxation of Investment Income" heralds a sea change in the treatment of investment income that can only be good for the New Zealand economy.
"The link between individual investment in productive assets and the strength of an economy - and the wealth of its citizens - is well proven.
"New Zealand is currently lagging in the level of local investment. The recommendations are an important building block to creating an environment where New Zealanders feel encouraged and empowered to invest," Weldon said.
"Tax is one piece of the puzzle that's been excluding them from that environment, and hence limiting New Zealanders' - and New Zealand's - future growth prospects.
"The moves signalled by the Stobo report to work towards aligning the definition of taxable income from such investments with that applied to direct investments will serve to open the door further to meaningful investment in this country."
Weldon said that the NZX views the prospect of this type of tax treatment for managed funds as a real plus.
"There's literally a world of opportunity out there for small and medium investors to grow their wealth and help to secure their future through both direct and managed investments."
Russell Investment group: The group says that Stobo report addresses anomalies in the tax system for equity investment by NZ collective investment vehicles (CIVs) and for offshore equity investment, whether direct or via New Zealand CIVs.
Stobo has recommended introduction of an investment and savings tax (IST), a variant of the risk free return method proposed by the McLeod Review in 2001.
Under this method, the taxable income is defined to be the value of the investment at the start of the year multiplied by a "standard" return, possibly around 6% p.a.
This method would be applied to all offshore equity investments and all NZ equity investments via CIVs.
This approach would meet many of the anomalies by: eliminating the difference between dividend income and capital gains - putting offshore investment and NZ investment via collective investment vehicles on the same footing - applying the same taxation basis to all foreign countries - passing the tax liability through to the investor whose own marginal tax rate would apply.
Stobo's recommendations meet most of the objectives, but
- He has placed precedence on consistency between offshore and onshore CIV taxation ahead of consistency between direct investment and investment viz CIVs.
- The minister may well decide that consistency between direct investment and investment via CIVs for NZ investment is more important. In this case, it is more likely that capital gains tax liability for CIV investments in NZ equities would be removed. There are a number of inherent problems with IST
- There is considerable debate about what the standard rate should be
- The investor would receive a tax bill even if the investment lost money and there is no cash income to pay the bill with
- The details for handling part-year investments are difficult and not yet worked out. (For example, if an investment drops early in the year, what is to stop the investor from selling it, buying it back immediately and thus locking in a lower tax liability for the remainder of the year? Investments that made the same annual returns but accrued them at different times during the year are likely to be taxed differently.)
- Neither the IRD nor tax advisors have any experience with this regime. The opportunities for tax engineering and avoidance could be huge.
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