NZ News 20/07 – Government crackdown targets trusts

The New Zealand Government’s plans to bring taxation aspects of family trusts into line with Australian regulations have met with fierce resistance from many tax specialists.

Peter Boyce, partner with PriceWaterhouseCoopers, says the Government's intention to tax all family trust distributions to minors at 33 per cent is like "using a nuclear bomb to kill a fly".

"The proposals are extreme and unwarranted. They go a lot further than just stopping tax avoidance," Boyce says.

Finance minister Michael Cullen has indicated the changes will take effect by April 1 next year and be included in the tax bill expected to be introduced into Parliament by November this year.

The proposals will see most income distributions to minors (a term yet to be defined but expected to 18 years old and under) through family trusts taxed at 33 per cent instead of the current 19.5 per cent. Treasury has estimated up to $15 million will be collected under the new rules.

"The Government is sending the message that if you use a family trust then it's a naughty thing to do," Boyce says.

"It's also saying that if you distribute income to a minor then it belongs to the parents. That is not true at law, once income is distributed to the minor then parents cannot use it for inappropriate spending."

He says the current rules catch most people using family trusts as tax avoidance vehicles.

"We believe there is no loophole and the suggested changes will penalise legitimate users of family trusts."

Australia has clamped down on distributions to minors through family trusts since 1980 but Boyce says the Australian legislation, which the New Zealand proposals are based on, is complicated and unwieldy.

"I've tried to read the Australian legislation and it's incredibly complex. That's inherent in imposing a blanket rule and then trying to carve out exemptions," Boyce says.

"The proposals won't increase the attractiveness of setting up a family trust but they will increase the compliance costs. I don't expect the changes to dramatically affect the number of people creating trusts but the potential for that to happen is there."

Investment adviser, Murray Weatherston, agrees the proposals are unlikely to deter people who have genuine reasons for creating a family trust.

"There are still a wide number of reasons for trusts but if a trust was created only as a tax avoidance vehicle there was always the risk that the rules would change," Weatherston says.

He says this was becoming more common with many businesses using family trusts as trading vehicles to avoid tax.

"Any government is entitled to protect its tax base and if the new rules are targeted at people diverting business income to minors through family trusts then they have my support," Weatherston says.

"However, I draw the line at taxing all distributions to minors at 33 per cent."

He says the distinction should be made between earned and unearned distributions through family trusts with earned income being taxed at the higher rate.

"All the criticisms I've read by accountants and tax experts say how terrible it is to tax unearned income but there is never any mention of the other earned income that is being distributed to minors through trading trusts," Weatherston says.

"It should be relatively easy to define earned and unearned income within a trust and that would get rid of 95 per cent of the problem."

He says many accountants and financial advisers are up in arms about

the changes because they have been actively promoting the use of

family trusts as trading vehicles and now their clients may be left

with a tax liability.

While the changes still have to proceed through Parliament Boyce says it appears the Government has already made up its mind.

"A cynic would say the decision is already made," Boyce says.

"It appears that this Government makes legislation by media release."

AMP drops overseas entry fees

AMP Asset Management (AMPAM) has reduced the minimum entry requirement for its listed passive international share fund in the wake of strong interest in retail consumers in overseas markets.

AMPAM product and distribution manager, Martin Murray, says the reduction from 3000 to 1000 units was made to allow easier access to the World Index Fund (Winz) following the sharp rise in its share price since listing three years ago.

"We were getting feedback from both the AMP and other intermediaries that 3000 units was perhaps a bit high," Murray says.

"When Winz was first launched the shares cost $1.10 but that's risen to about $2.30 today. 3000 units at that price would cost about $7000 and that disqualifies certain investors."

He says the entry requirement will not be reassessed if the Winz share price drops.

"We believe that shares over time will increase and any weakness in the share price will be a temporary thing."

The fund has now attracted $1.7 billion making it the largest listed international investment fund in New Zealand, with a lot of the interest from smaller investors.

"We've been promoting to New Zealanders the value of shifting some of their assets offshore and Winz has been a very successful vehicle for doing this," Murray says.

He says investors will also be able to access more overseas funds within a month when AMPAM release nine sector funds from its UK sister company, Henderson Investors.

The move follows a Securities Commission decision earlier this year to exempt UK-based funds from producing a separate prospectus and investment statement when offering products in this country.

"As part of the move to offer greater diversification offshore for New Zealanders we'll be offering the Henderson funds very shortly," Murray says.

"We already know there'll be a great demand for these funds when released going on feedback we've had from intermediaries."

The nine new funds are made up of five geographical funds, a technology fund, an ethical fund, a global bond and an international shares fund.

Murray says the popularity of Winz and interest in the Henderson funds is part of a general trend amongst New Zealand investors to diversify overseas.

"The New Zealand public is becoming better educated about the need to save for retirement and the most prudent way of doing it."