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NZ Revenue Department Sets Out Tax Options For Offshore Investments

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

17 December 2003


A consultation paper published by New Zealand’s Inland Revenue Department has presented two different options for the tax treatment of offshore investments.

One is a version of the risk-free rate of return method recommended by the Tax Review 2001. The other provides a choice of income calculation methods for non-controlled offshore investments, such as taxing a proportion of the change in share value and distributions.

Under the first option, investments would be taxed on an imputed 4% standard return rate (distributions such as dividends would not be taxed when issued). The basis would broadly apply to non-business investments in foreign companies, unit trusts, foreign superannuation schemes and life insurance (qualifying assets).

The second option would apply to holdings of non-controlled offshore equity investments which cost more than NZD$15,000.

Minister of Finance, Michael Cullen commented that: “Offshore shares are now a much more common investment choice than when the rules for taxing income from these investments were developed in the 1980s and early 1990s.”

“The main weakness of the present rules is that they tax similar offshore investments differently, depending on the country that is invested into. This creates distortions in how and where New Zealanders invest."

“The rules also create problems of tax base maintenance. This occurs, for example, when New Zealanders invest in Australian unit trusts that in turn invest in instruments like New Zealand government stock, achieving virtually tax-free returns."

The paper also includes an account of work carried out by representatives of the New Zealand savings industry and other officials, exploring the possibility of applying the risk-free rate of return method to domestic investment vehicles. The government is very interested in seeing this work continue.

The full text of the Discussion Document on the Taxation of Non-Controlled Offshore Investment In Equity can be found in the Tax News Resources section.

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