Investment tax on the NZ agenda

THE advantages currently enjoyed by many New Zealand investors may be lost soon, if Finance Minister Michael Cullen proceeds with plans to adopt one of the key ideas in the 2001 McLeod tax review.

Cullen has signalled that he is keen on adopting the risk-free rate of return (RFRM) model for taxing investments.

Under this model, investments would be taxed at the so-called risk-free rate of return. For example, if the rate was set at four per cent, an investor would pay tax on the return of four per cent regardless of earnings.

The chair of the tax review, Rob McLeod, says that if the Government does adopt the RFRM model, then investments such as passive funds and United Kingdom-based Open-Ended Investment Companies (OEICs) could lose their tax advantages.

“The biggest concern from the Government’s point of view on tax design is the messy treatment [of foreign investments] and the fact that tax drives the form and extent of investment. I think [RFRM] has the potential to iron out a lot of the creases,” he says.

But McLeod says his “instinctive judgement” is that RFRM may be seen as a tax advantage as investors have to pay less of their returns to the Government in the form of tax.

Cullen hopes to detail the Government’s likely direction on these issues in the May 23 budget.