Tax review to target savings vehicles
The Tax Review panel appointed to assess whether the New Zealand tax system meets today's needs, and chaired by Rob McLeod, released its final report last week.
The most controversial recommendation contained in the preliminary issues paper released in June (a proposed home-ownership tax linked to risk-free rates of return) has been dropped from the final report.
But is does recommend a risk-free formula be used to tax savings vehicles, which would remove advantages currently enjoyed by passive funds and UK open-ended investment companies.
Other key recommendations include replacing the four income tax bands with two rates and reducing the 33 per cent company tax rate. Reducing tax on income from new overseas investment in New Zealand to 18 per cent is another recommendation.
The review team also repeated its view that there should be no tax incentives for savings. There was no evidence New Zealanders had a poor savings record or that tax breaks would increase overall savings levels, it says.
Review chairman Rob McLeod said Finance Minister Michael Cullen had spoken positively about the application of the Risk-Free Rate Method (RFRM) to savings entities.
Under the RFRM model, tax liability on savings would be calculated on the basis of the net asset value at the start of a year, times a statutory risk-free real rate of return, times the investor’s tax rate.
The statutory risk-free rate is currently estimated at about four per cent.
In a statement by the Finance Minister coinciding with the release of the report, Dr Cullen said the review team’s ideas on international tax and tax treatment of entities would be included in the Government’s tax policy program, though design issues had to be worked through.
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