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PwC Critical Of Amendments To New Zealand's Offshore Tax Bill

by Mary Swire,, Hong Kong

07 December 2006

Accounting firm PricewaterhouseCoopers has expressed disappointment with the findings of a parliamentary report concerning the New Zealand government's proposed changes to the taxation of managed funds and offshore portfolio investments.

The report from the Finance & Expenditure Select Committee to Parliament proposes revisions to the bill containing radical changes to the taxation of New Zealand managed funds and, more controversially, the taxation of offshore portfolio investments.

While Paul Mersi, financial services partner at PwC, said that the bill could go a long way to reducing long-standing distortions in the tax treatment of investors in relation to share and unit trust investments, the committee has missed a trick by failing to deal with unpopular items in the offshore part of the bill.

“While the change to the way New Zealand managed funds will be taxed is a hugely positive one that has been 20 years in the making, the proposed taxation of offshore portfolio investments is still too harsh. It is surprising and disappointing that the Select Committee did not go further in the changes it has proposed to the bill," he noted.

For New Zealand managed funds, the bill will make the tax outcomes of New Zealanders investing in unit trusts and super funds (including KiwiSaver) more consistent with direct investment in shares. However, the proposed changes to the taxation treatment of offshore portfolio equity investments have generated more controversy.

The bill had originally proposed to tax investors on 85% of the unrealised market value movement of their offshore investments (with the only concession being GPG and most Australian-listed shares). But a record number of submissions in opposition to these proposals has resulted in the Select Committee proposing changes to the bill which would result in New Zealand investors paying tax on an assumed income of 5% of the value of their investments each year (or the actual gain if lower in any year).

“We sensed a palpable and very strong consensus forming during the Select Committee hearings around a simple, flat rate of tax at around 3% - not the so-called ‘Fair Dividend Rate’ of 5% which the Select Committee has recommended in this report,” Mesri observed.

“Experts who made submissions were unanimous that 5% was well above the actual dividend yield on international shares," he added.

Mesri said that if taxpayers perceive that the tax is too high, it will lead to "less-than-full" compliance, placing significant pressure on Inland Revenue in terms of enforcement.

“It seems such a shame that the acceptability of this change could have been materially improved simply by pitching the rate a little lower and with relatively little cost to the Government. I think that in time this will be regretted as a missed opportunity," Mesri concluded.

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