Reaction to Stobo and Adviser regulation

Phil,

I have a couple of questions as you obviously know more about these recommendations than I do - or I'm missing the point as well.

If the intention is to create a level playing field, then why tax foreign investments at all? Why not treat them the same as local unit trusts - a level playing field.

To approach it from another angle - If you like an IST idea so much why not have it apply to all investments? Or is that too much like a capital gains - or wealth - tax???

Without knowing all the details - do the recommendations mean that if you invest in a local unit trust that invests offshore you avoid capital gains tax, whereas if you invest offshore direct you get stung with IST. Did I hear someone say "level playing field" again?

...and lastly, as an educated investor, why do you pay capital gains on offshore investments now?

Which brings us back to the level playing field again... If we assume the RFRT is set at 4%:

This new regime means I will get taxed 3 different ways depending on how I invest:

1) If I invest in non-dividend paying, growth companies in the NZ market, I get taxed 0%.

2) If I invest in dividend paying companies in the NZ market, I get taxed 33% on those dividends which usually yield anywhere between 4 and 8%.

3) If I invest in offshore companies, I get taxed at 33% on the nominal 4% growth of that asset which might be by way of growth (as in option 1) or dividends (as in option 2).

This is going to affect the investing behaviour towards option 1 (although that is a higher risk set of opportunities) or option 3.

Which is going to drive investment OUT of NZ which I didn't think Cullen wanted...

Is this an accurate representation?

Andrew

The first point to make is that as I understand the proposals CGT goes altogether - no matter whether it is a foreign or domestic fund.

If you invest into a foreign fund you will be taxed on the IST basis. That is you will pay tax - no matter how well or poorly the fund performs - on an arbitary basis.

If however you choose to use a locally based fund you will be taxed in the same manner as you are with a bank deposit.

The playing field is not level, or if it is level it is like there are different sorts of grasses growing at each end of the pitch.

As for the question about IST on local and domestic funds all I can says is that Craig wanted it on both but the industry said foreign yes, domestic no.

The reason? Well I'm guessing that they may find it hard to justify and explain to their investors. The upshot of this is that it appears as though Cullen is backing the NZ industry.

This fits with a speech which was made a number of years ago.

http://www.goodreturns.co.nz/article/976485623.html

May be changes such as this help the industry grow and encourages top managers to come back to NZ. We have seen a few return recently, such as the people behind Salvus, ING's new CIO and AMP's new equity manager.

Hi Robert

I ran your query past Craig and he has provided this answer:

In principle the playing field is not level now. My Report "Towards Consensus" had as one of its objectives to move us closer to consistency of tax treatment across the tax boundaries identified.

a)This is always a hard concept to get across from an investor's perspective, but I did try in my report. See page 4. The perspective to adopt is the Government's or in economic terms "a national welfare" perspective. The NZ Government already taxes NZ companies on their profits.

The direct investor's tax liability after investing in a NZ company is adjusted through the imputation regime.

The NZ Government however does not tax the profits of foreign companies...foreign governments do.

To make up for this the NZ Government taxes local investors who decide to invest offshore as a proxy for taxing foreign companies. Otherwise,from the Government's perspective, capital may move offshore. Hence the FIF regime.

The fact that foreign governments chose to tax their companies should be seen by local investors as a cost of investing-just as the relative costs of production are factored into the investment decision when buying a foreign company.

b)I did suggest applying IST to offshore and local collective investment vehicles as it aligns onshore/offshore portfolio taxation and gets NZ closer to the taxation of economic income. Unfortunately we don't tax economic income currently, so the implemetation is novel although already in place in the Netherlands in a similar way to the prospective proposal in NZ.

IST's best chance of implementation is offshore, where the current taxation regime for portfolio investment-FIF-is a worse regime in my opinion.

c)No. The IST regime applies to overseas investments,whether through a local CIV (unit trust) or directly offshore (Aussie unit trust. It is the end investment that is critical to the application of the tax,not the interposed vehicle.

1.Yes. If you are a direct investor on capital account- ie: not in the business of investing or do not purchase with the purpose of selling. Good luck on your interpretation since the law is not helpful. This does not represent a change from existing tax law.

2.Yes. If you are a direct investor on capital account- ie: not in the business of investing or do not purcahse with the purpose of selling. Good luck on your interpretation since the law is not helpful. I assume you are a 33c taxpayer. This does not represent a change from existing tax law.

3.Assuming the IST is set at 4%,(and that is a critical assumption) and you are a 33c taxpayer,you will have to pay 1.32% in tax regardless of the movement in the company's share price. You also know this liability in advance which assists your cashflow planning,and you have no uncertainty over whether you are on capital or revenue account. You are liable.

The taxation of dividends no longer applies. And you can invest anywhere in the world using the same taxation methodology, including low tax countries.Currently you pay tax under a choice of four different accounting methods if you invest in a FIF non grey list country; while you effectively have atax preference by only paying tax on dividends if you invest in one of the seven grey list countries.

Several comments on capital flows.

a)I looked at the behavioral effects of the proposed IST regime vs the current tax rules on direct NZ portfolio equity investment, in terms of prospective changes in risk profiles. Because we don't know where risk profiles are now we couldn't assess whether more investment would go offshore chasing gains in excees of the risk free rate or not.

b)A critical precondition for assessing flows is of course the IST rate. Set high and flows may remain at home. Set low and it may encourage overseas investment.

I hope these comments help.

Craig