New Zealand Considers Changes To Tax On Investments

by Mary Swire, Tax-News.com, Hong Kong

10 November 2003

The New Zealand government is currently considering wide-ranging changes to the way domestic investments are taxed in a move that was originally targeted only at the offshore sector, the National Business Review reported last week.

This means that the so-called ‘risk-free rate of return’ method (RFRM) of calculating tax, recommended in the McLeod Tax Review of 2001, could be applied to both domestic and offshore investments. Reports indicate that this is the most favoured option of Finance Minister Dr Michael Cullen.

It is thought that the proposal will be included in a discussion document to be released by the government before Christmas. It appears that it is the surprise closure of a loophole in August which allowed New Zealanders to invest in Australian unit trusts which were in turn used to invest back in New Zealand, which has acted as the catalyst for the proposed changes.

Experts believe that RFRM is favoured by the government due to its consistent revenue stream in both bull and bear markets. It is calculated based on the value of shares held in an overseas account at the start of the year and then multiplied by the risk-free rate and then again by the investor’s tax rate.

"The disadvantage of the risk-free rate-of-return method ­- and we may be able to find a way around this ­- is that it requires paying tax when you make a loss," Investment Savings & Insurance Association chief executive, Vance Arkinstall told the National Business Review.

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