TaxBlog

Finance Minister Michael Cullen is back-pedalling rapidly from controversial plans to impose a capital gains tax on overseas share investments.

Some variation of an alternative, the deemed rate of return method, was likely to emerge from the select committee now considering the legislation, he said yesterday. “And I’m perfectly comfortable with that,” Cullen said.

The finance and expenditure select committee has asked officials to look more closely at a proposal put by PricewaterhouseCoopers chairman John Shewan on August 30.

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In a shock story today there is talk that the trust tax rate may rise to 36%.

The government is facing a second major rebellion over its tax policy amid growing certainty that it’s planning to raise trust tax to 36 per cent.

The potential tax grab, which would affect hundreds of thousands of New Zealanders, has prompted opponents to form a fighting fund aimed at forcing a government rethink.

The protest follows a storm of opposition to legislation introducing a capital gains tax on overseas investments.

The Trustees Association believes the government is plotting to raise the trust tax rate from 33 per cent as part of its proposals to drop the company tax rate. Not only would the trust tax hike help compensate for reductions in the company tax take, it would also hit back at people using trusts to shelter their assets from the taxman.

The plan would create a new range of rates, with company tax cut from 33 per cent to 30 per cent, top personal tax cut from 39 per cent to 36 per cent, and trusts increased from 33 per cent to 36 per cent.

Association chief executive Errol Anderson said the plan would mean that children, often the beneficiaries of trusts, would end up paying more tax than giant corporates.

“That’s a very cruel tax -targeting people who can’t defend themselves. (The government) will see trusts as an easy touch for raising tax, unless we unite,” Anderson said.

Though no final decision had been taken, Dunne admitted one option, backed by the IRD, was equalising the top personal trust and income tax rates at 36 per cent, and added that the government had crunched the tax numbers on tax paid by trusts.

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Phil has some excellent insight and analysis on the current tax changes:

In less than 24 hours three major government projects in the financial services sector have been put back. The Ministry of Economic Development, yesterday, said that it is giving another month for submissions on adviser regulation and today a raincheck has been given on KiwiSaver and tax changes.

A question one must ask is this: Are these policies such a mess that the government is about to start back peddling on them?
Put another way: Are they so ill-thought out and in urgent need of a rethink that extensions are a good way of buying time to find a fix?

My guess is no on KiwiSaver and possibly yes on tax.

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The finance select committee yesterday held its first public sessions on the Taxation (Annual Rates, Savings Investment, and Miscellaneous Provisions) Bill.

Amongst other things, it puts in a new tax regime for New Zealanders directly investing overseas and also proposes changes to the taxation of portfolio investment entities in New Zealand.

Ernst and Young told MPs in a written submission that the tax on overseas investment was inconsistent with the regime in New Zealand and would result in over taxation.

The accountancy firm and others also argued that the $50,000 threshold was too low and would “discourage” compliance because the rules were too complex.

The Institute of Chartered Accountants said the proposals on portfolio investment entities were “complex and tortuous” and would create results to defeat the positive policy objective.

The institute called for the abandonment of the overseas investment changes.

The Law Society said the proposals as drafted would be “detrimental to the New Zealand economy and potentially the New Zealand tax base” because it would stop foreign investors taking up residence here and drive New Zealand investors overseas.

“A capital gains tax on unrealised gains is the harshest possible form of tax treatment,” the society said.

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The following is a quote from accountant Bruce Sheppard Chairman of the NZ Shareholders Association regarding the new investment rules:

“The passing of this bill will not affect me personally to any degree except to the extent that my professional income will increase.”

“Every new complex band-aid to the Tax Act creates new avenues for avoidance and mitigation. Remedial bills will be required.”

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Phil has made a bold prediction:

I’ll stick my head out here and make a bold prediction: The government will back down on its proposed changes to tax on investments. They won’t go through Parliament in their present form.

This view has been percolating along in my mind for a little while now as it becomes apparent that the government is starting to realise that the changes are hugely unpopular.

This is clearly borne out by the unprecedented number of submissions (more than 3600) which have been made to the select committee. The government has clearly misread this one.

The more people I talk to the more I realise this issue is big and the anti-feeling is right down at the grass roots level – the Mum and Dad investors.

Plenty of organisations have been talking about it and it appears fund management/investment firms have engaged their clients on the proposals, and motivated them to find out more and take a position.
ore and take a position.

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A mountain of submissions have been received by the select committee examining planned new tax rules on overseas shareholdings.

It was revealed yesterday that 3681 submissions have been made, when typically a tax bill would attract around 50.

About 37 hours have been set aside to hear the submissions.

National MP John Key yesterday argued that the big response indicated an “overwhelming level of concern” about the Government introducing a capital gains tax on savings.

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The latest proposals from Inland Revenue go a long way to assuaging concerns about planned tax reform legislation.

Venture capitalist Jenny Morel says that the changes to the tax regime as originally proposed would have been “a complete disaster�.

Software developer John Blackham told Computerworld (May 15) that the initial proposal to introduce a capital gains tax on investment in companies based in New Zealand but which have an overseas’ investment base, typical of many IT startups, would be a “death sentence� for innovation in this country.

He and fellow entrepreneurs made proposals to ministers for ways of alleviating the burden last month, and the government announced a partial back-down as part of its budget round, saying it would give certain investors in these companies a five-year “holiday� from the new tax.

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Phil has some good thoughts as usual on the new investment tax.

The following is what was said in the House according to Hansard:

John Key: Will the Government cave in to any other companies if they too start to take out full-page ads in the newspaper, and in that case, which companies?

Michael Cullen: No. I see suggestions are made that those who set up UK investment trusts should have some kind of transitional exemption. Those trusts are set up deliberately as avoidance mechanisms using the grey list.

Phil goes on to say:

Cullen is wrong, wrong, wrong. Many UK listed investment trusts like Foreign and Colonial have been around for more than a century. They are a bonafide investment structure both in the UK and New Zealand. They are another form of legitimate managed fund but with a number of differences to the traditional NZ-domiciled fund.

It’s a pretty bad move by Cullen to call the UK listed trusts tax dodges. There are many possible reasons why trusts may be resident in the UK. In any case, by using the phrase tax avoidance this automatically paints the trusts in a bad light. If the can legally reduce their tax liability, this isn’t avoidance Dr. Cullen.

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 A good post over at Phils blog on the new investment tax:

It’s becoming clear that the government’s new bill on taxing investments is going to be a shambles and the outcome is likely to, therefore, be a mess.

…there was an acknowledgement that the bill being introduced was incomplete.

This reinforces my view that important tax law was being rushed into Parliament without proper thought and preparation from the politicians.

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