Form of capital gains tax being considered

Reports that the government have decided on the “comparative value” (CV) method of taxing offshore investments are premature – but officials are taking another look at the option.

Friday, April 15th 2005, 5:12AM

by Rob Hosking

Finance Minister Michael Cullen’s office says however that no decisions have been made.

The method is a modified form of the current foreign investment fund (FIF) rules. It was one of two options put forward in the December 2003 discussion document on taxation of foreign domiciled funds – the other being the more widely discussed risk free rate of return (RFRM) method.

The more recent Craig Stobo report on taxation issues focussed almost solely on the RFRM option for taxing offshore investments, and this appears to be one of the reasons officials have gone back to take another look at the comparative value option.

The biggest political hurdle for CV though is that it is a form of capital gains tax – something Finance Minister Michael Cullen has repeatedly said he does not want.

However he has also indicated that RFRM has political difficulties in that it taxes investors whether they make a gain or a loss.

Put simply, CV takes the value of an investment at the start of the year, the value at the end, and taxes the difference (plus dividends) if there is a gain in value.

“It is a form of capital gains tax, yes,” says Pricewaterhouse Coopers tax partner John Shewan.

“The big question people are then going to be asking is whether this is the thin end of the wedge.” Given the political difficulties though he doubts this.

One option – canvassed in the December 2003 discussion document - is a revised comparative value method whereby only 70% of the change in market value – plus dividends – is taxed.

“That would be more popular than a full CV method.” The Investment Savings and Insurance Association says it has reservations about the CV method but does not reject it. “It’s another option, worth looking at,” says chief executive Vance Arkinstall.

“If it is suitably implemented, we are confident we could live with it.” The next clear indication of the government’s intentions is likely to come in the May 19 Budget.

The most likely move after that is another discussion document with a refinement of the options already canvassed in the 2003 paper.

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

« More concerns about new bill

Sovereign takes regulation bull by the horns »

Special Offers