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New Zealand's Capital Markets Taskforce Recommends Tax Reforms

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

18 December 2009


New Zealand’s government has welcomed the Capital Markets Development Taskforce's recommendations to improve the functioning of the country's capital markets and, in particular, its proposed tax reforms.

"As part of its report, the taskforce has recommended a number of changes to the tax rules so they do not distort investment choices,” Revenue Minister Peter Dunne said.

"In particular, the taskforce has recommended that the company tax system with imputation be retained and that mutual recognition of imputation credits with Australia be pursued,” he continued. New Zealand has already made a submission on mutual recognition to the Henry Review in Australia and the proposal is being considered in this context.

He added that the taskforce has also recommended that imputation credit "streaming" (that is, the directing of credits to those shareholders best able to use them) not be allowed. A government discussion document released in August last year sought submissions on that issue, and can be expected to be discussed next year.

"The taskforce has also endorsed changes suggested in an officials' paper released in September which would exempt certain interest payments from non-resident withholding tax and from the approved issuer levy,” Dunne continued. “Changes are being suggested because the current rules may be hindering the development of a domestic bond market.”

He pointed out that another recommendation supports clarifying the tax treatment of profit distribution plans and the income of non-resident partners in New Zealand’s limited partnerships. He disclosed that officials have already begun work on both these issues.

Its recommendations also include allowing a tax deduction for the cost of raising equity, and bringing the tax treatment of annuities into line with the treatment of similar investments. With regard to the former, it is of the opinion that the disparity between tax treatment of equity capital-raising costs and debt capital-raising costs should be reduced by allowing the cost of raising equity capital to be deducted over the lesser of the life of the equity or 20 years.

Dunne said that some of the recommendations to reduce tax biases between different investments are currently being considered by New Zealand’s Tax Working Group as part of its work on reforming the tax system. However, potential solutions that the taskforce identified are:

  • a risk-free return method tax (in the case of housing or buildings);
  • denial of depreciation deductions for buildings;
  • a specific capital gains tax on any under-taxed asset; and
  • a general capital gains tax.

The taskforce also suggests a review of the thin capitalization rules for non-resident-controlled companies, with a view to reducing the safe-harbor threshold from 75% to 60% to reduce the incentive for whole takeovers of New Zealand companies by foreigners so that they can strip out profits with interest. However, it says that the 110% of worldwide debt-to-assets ratio alternative test should remain, to ensure that legitimate debt financing is not disturbed.

Commerce Minister Simon Power confirmed that the government will look closely at some of the recommendations as part of the current review of the Securities Act. Discussion documents on the review should be released in the new year.

"The Government will consider the report as a matter of priority over the coming weeks, and we expect to be able to detail early in the new year how it will be progressed,” he said. "These recommendations are a key part of the government's wider work program for the financial sector, and to demonstrate just how important we regard it, the Prime Minister will lead the response by announcing it early in 2010.”

A comprehensive report in our Intelligence Report series giving a country-by-country analysis of offshore investment funds, stock exchanges and trusts, with an analysis of the US QI regime, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report9.asp

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