Wednesday, April 12, 2006

Thomas Pippos: Investors will love or hate it

You'll either love it or hate it.

At the love end of the continuum will be the New Zealand funds management industry. It has never had it so good from a tax standpoint since the days of tax relief for superannuation funds and contributions. The honeymoon period will shortly be over and the industry will have to face the huge task of managing the implementation of the new regime with effect from April 1 next year - without the benefit of detailed legislation.

At the hate end of the continuum are those New Zealanders who invest directly in overseas markets. They will get walloped by this new regime.

They are worse off than before and, no doubt, considering their next move given the change in the investment distortion paradigm.

Ultimately, many will choose to exit their international investments to relocate them to either Australia or NZ.

At the emotive end of the spectrum, it does nothing to retain or attract such individuals. Let's not lose sight of the fact that the considerable tax advantage enjoyed by these individuals has been to be taxed under a classical taxation model where actual income dividends are taxed - hardly a culpable act.

The debate will now move to the select committee, with the focus likely to be on additional carve-outs, like the one proposed for Australian-listed companies.

The tax paradigm for the future is now also different. There will be pressure on to extend the proposed measures to other forms of investment. It will just be a matter of time.

Overseas equities with low dividend yields are not the only investment that can yield low taxable income while still producing a higher economic return.

Other such investments can easily be stated as providing situations where investors are not paying a reasonable amount of tax.

What about the $100 million tax reduction? Surely that has to be good. The shine is somewhat taken off, given the winners and losers that flow from the Robin Hood principles of taxation. One would also have to be somewhat sceptical with such fiscal projections, given recent history regarding their accuracy.

At the end of the day, the quid pro quo for any considerable broadening of the tax base should be a widespread reduction in the tax rate.

* Thomas Pippos is managing tax partner at Deloitte.

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