Proposed tax changes will make people poorer in retirement

The government’s intention to change the taxation of investor’s returns was announced by Minister of Revenue Michael Culen in his budget speech this year. The follow-up media release on June 28 is mild, but the simultaneous, lengthy ‘discussion document’ released by the IRD's, Policy Advice Division reveals advanced planning for a serious new distortion and tax-grab from investors.

If successful, the plan will result in significantly dimmer prospects for private portfolios beyond the April Fool’s Day, 2007 start date. Important changes proposed are:

1. Government’s plan is to introduce a comprehensive new capital gains tax on the offshore components of an investor’s portfolio.
2. New Zealand’s onerous Foreign Investment Fund (FIF) regime will extend to traditionally friendlier and more familiar jurisdictions, including Australia. A portfolio’s offshore holdings – cash deposits, property, shares or funds – will be fully assessable on any increase in price, converted to NZ$, and irrespective of actual trades if any or the investor’s purpose.
3. The new tax will be on accrued gains, measured yearly and at the investor’s full marginal rate (usually 39%). No deduction will be allowed for taxes already paid by offshore companies or on offshore investments at source.
4. The previously favoured, ‘grey list’ of seven investment jurisdictions (Australia, Canada, Germany, Japan, Norway, United Kingdom, and the USA) – previously deemed to have rules, regulation and tax-levels roughly similar to New Zealand - will be extinguished. Imposition of double taxation will have the effect of making jurisdictions that are more respectable less competitive than investments in less regulated and lower-taxed regimes, or in dodgy tax havens.
5. For private portfolios, investing into New Zealand assets will remain as current – provided the holder is not a trader. Local fund managers will have won a major concession. They alone will be able to trade locally without incurring tax, provided they set up new vehicles (called ‘QCIV’s).
6. QCIV’s will have the flexibility to withhold tax at investors’ marginal tax rates.

Effects will include:

a) New Zealand will switch overnight from having a competitive and efficient regime for private client portfolio investors to operate from, to an unattractive place in which to hold offshore investments, with probably the most punitive tax regime anywhere.