A Tax Grab from Any Angle

With care, the impact may not be as bad as first thought. The Taxation (Savings Investment and Miscellaneous Provisions) Act 2006 brings significant change to the taxation of investments. This will impact returns from offshore shares and managed funds. Also, it raises many questions about just how the tax should be calculated.

Generally, the new rules apply to offshore resident managed funds and offshore listed equities - other than some Australian resident listed companies. All these investments will be subject to the new tax rules, unless a Foreign Investment Fund (FIF) exemption applies.

The fair dividend rate (FDR) is the default and will apply to most offshore equity investments except fixed rate shares, non-participating redeemable shares, and investments that contain 80% of NZ dollar debt securities, offshore investments with a guaranteed return, or where not practical (for example when market value cannot be determined).

Investors holding offshore investments directly will be taxed at their marginal rate (19.50%, 33.00% or 39.00%) on 5.00% of the market value of their total offshore investments held at the beginning of each tax year, plus what is coined as ‘quick sale adjustments’ (QSA) which are purchases and sales during the same tax year.

Tax will be calculated on the lesser of any actual gains and 5.00% of the cost of shares sold. If the actual return (market value movements and dividends) exceeds 5.00% of opening market value, no tax is payable on the excess.

Dividends will not be taxed separately, as they will be included under the 5% and losses will not be deductible, but foreign tax credits can be offset against the tax payable. Managed funds will be taxed on 5.00% of the average market value of their offshore portfolio plus QSA’s. Daily priced funds do not make QSA’s.

As always there are some exemptions:

• Where an Australian unit trust provides a NZ resident withholding tax (RWT) facility and the holder requests RWT to be deducted.
• Individuals whose total cost of offshore investments excluding Australian resident-listed shares and exempt Australian unit trusts (above), does not exceed NZ$50,000.
• Investors in resident-listed ASX companies, and maintain a franking credit account in Australia.
• If holding investments purchased before January 2002 you will be able to use either actual cost or 50.00% of the current value as at April 2007.
• Also, certain specific exemptions; GPG shares and NZ investment trusts and venture capital companies.

Any that fall within the FIF exemptions will be taxed under the existing rules on dividends only, unless held on a revenue account basis.

The changes apply from 1st April 2007 for investors with a tax year end of 31st March. Managed funds are treated differently and will apply the new regime from the first day of their 2008 tax year.
Managed funds that intend to elect into the Portfolio Investment Entity (PIE) rules use either the 2008 income year or 1st October 2007.

At this point an investor is deemed to have ‘disposed’ of their investments at market value. Gains or losses will not be taxable or deductible to capital account holders. Revenue account holders will be taxed with the liability paid over a three-year period.

A benefit is that if the dividend yield from offshore investments is higher than 5.00%, the tax payable is capped at 5.00%. With this in mind some may achieve better after-tax returns than with an AUT or $50,000 exemption.

Investors will need to determine if an investment in an AUT should be included under the NZ$50,000 exemption (FDR rule applies to the investments held in those trusts). A warning is that if the AUT exemption can’t be made, the RWT facility may not be available. This may mean the investor needs to file a tax return and or make provisional tax payments.

Just a wee word of warning, the matters are complex and we are still working through a number of the issues to confirm the most efficient options under the new rules and any actions should be a result of specific advise on a personal level.

Original Article published February 2007