Dreaming about tax isn't a good idea, but if it happens....

Wednesday, November 17th 2004, 8:25AM 3 Comments

For the first time in more than a decade a long-held dream of the funds management and advisory community has finally looked like it may actually become a reality.
The dream has been that investors in managed funds are treated from a tax perspective at their own marginal tax rates, as opposed to been taxed - often at a higher rate - in a fund.
A report released today, which was penned by former BT Funds Management chief executive Craig Stobo, on the taxation of managed funds proposes (as Good Returns has been saying for a number of weeks) that foreign funds be taxed under a form of RFRM and local funds will be treated like bank deposits.

The upshot of this is that managed funds will be pretty much on par with other forms of investment.
Investors will be responsible for their own tax - rather than leaving it to fund managers.
In a funny way this is a Labour government telling its citizens to take responsibility for their own affairs - sure an oxymoron?
To me the report, which Finance Minister Michael Cullen seems warm on, achieves what organisations that preceded the ISI (the IFA and UTANZ) have fought for. It reminds me of people like Mark Pickering. Mark was a senior manager at Westpac and one of the people behind the formation of the ISI. He fought for this cause for years and has now left the industry.
I spoke to Craig this afternoon and he is clearly very pleased with the outcome and his contribution saying it is something he failed to achieve during his long tenure at BT and as a member of the ISI.
Although the story of his sudden and unexpected departure from BT has never been told, we may one day thank Westpac for its actions. Without them Craig probably wouldn't have written this report.

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Comments from our readers

On 17 November 2004 at 11:48 pm Russell Hutchinson said:

Nice to see you blogging Phil - awesome!

Stobo's preferred option would get my vote - because it would sort out the Australian Unit Trusts issue - yet Cullen is not keen, by the sound. What's your analysis on how this will play out?

Cheers

RH

On 18 November 2004 at 2:23 am Philip Macalister said:

Hi Russell

Thanks for that. The way I read it is that contrary to some reports out there Cullen is actually quite keen and receptive on the IST regime for foreign-based funds.

However, he (like most of the industry) is not receptive to IST on domestic funds. This suggests that maybe he is favouring the local funds management industry over others - such as Australia.

I particularly like the flow through option on local funds as it means investors will be able to better manage their affairs and advisers will be able to add extra value.

On 23 November 2004 at 12:57 am Grant Niccol said:

Philip

Something I am having difficulty accepting from the Stobo Report is that gains made by active equity managers in a so-called CIV are "capital" gains. They are no different to business profits made by any other trader.

If individuals make gains buying and selling (trading) equities, then those gains are taxable, just like a CIVs. If individuals adopt a buy-and-hold strategy, then realised gains made on sale are capital in nature, just like gains made in an indexed, binding ruling equity fund. Dividends are taxable in either case.

What's missing is some sort of imputation regime for superannuation schemes and the like which can flow gains to individuals so they can be taxed at their marginal rate.

Exempting trading gains made on equities by CIVs will surely only lead to more distortions. Great for the managed funds industry but good for the country?