Proposed tax changes

Question

 

I’m reading about proposed tax changes on international investments and already my adviser is keen to have me change my portfolio. I do not know exactly what and why we are having these changes imposed but it seems a bit early to be making changes when the ink is not even dry on the legislation.

Answer

Let’s get it out front – nobody likes to pay tax – but we all do (well most of us)! It is fair to say the change to or difference in the tax treatment of capital gains from international and Australasian based investments will increase the attractiveness of Australasian shares held both directly or via a ‘collective investment vehicle’.

However, international assets will still be very attractive, despite the impending changes. Combine the likelihood of a continued fall in the New Zealand dollar, and long run returns the argument for a continued allocation to offshore assets becomes even more compelling.

Be aware of the real tradeoffs between risk and return, to hold a portfolio asset allocation that is purely tax-driven may overexpose an investor with respect to risk and lead to a nasty surprise – ouch!

There is little doubt that we will see an increase in Australian assets owned by Kiwi’s. This is also likely to result in fewer New Zealand shares held as we are no longer the cheaper market we once were.

A slower New Zealand economy is likely to continue for much of 2006 with definite risks of a longer period of under-performance compared to both Australian and international investment.

Real growth is still to be had in international markets and there are still good investment opportunities. Japan, Europe and the emerging markets (the so called BRIC) look to be among those with continued upside.

In short, I see little benefit to hurry in selling good, sound international investments just because of impending tax change. Sticking to a reasonably diversified approach will reward over the longer term, tax or no tax.

 

Original Article published January 2006