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Inland Revenue

Tax Policy

PUBLISHED 7 July 2004

Taxation of investment income - chair appointed

The government has appointed Craig Stobo to co-ordinate consultation on problems with the taxation of investment income, both onshore and offshore, and to develop options for reform of the relevant taxation rules. He is to consult widely with the savings industry and other interested parties and report back to the government by late October. For more information and the terms of reference for the appointment, see the government's media statement.

Hon Dr Michael Cullen
Minister of Revenue


Chair to consult on taxation of investment income

Craig Stobo has been appointed to co-ordinate consultation on issues with the taxation of investment income, both onshore and offshore, and to develop options for reform.

"Mr Stobo is eminently suited to the role," Revenue Minister Michael Cullen said today. "He has an extensive background in the New Zealand savings industry and is a highly respected expert in his field.

"The current rules are potentially unfair since the tax treatment of an investment can vary depending on a number of factors, including whether it is made directly or via an intermediary and whether it is held onshore or offshore.

"These problems can also give rise to economic inefficiencies and distort the way people invest. The government's view is that, as far as possible, the tax rules should not influence investors’ decisions.

"Mr Stobo will consult widely with the industry and other interested parties, in developing proposals for change and will report back to the government by the end of October," Dr Cullen said.

Contact: Patricia Herbert [press secretary] 04-471-9412 or 021-270-9013. E-mail [email protected]
Technical inquiries to Helen Mackenzie [tax advisor, Dr Cullen's office] 471-9728

The terms of reference for the appointment are attached.

Terms of Reference

Taxation of investment - consultation

The government will appoint an independent chair to ascertain whether a consensus is emerging on how to address the current problems with the taxation of investment income, both domestically and offshore. The chair would be responsible for consultation on options that are consistent with developing such a consensus. The chair would consult widely with the New Zealand savings industry and other interested stakeholders.

The mandate of the chair will be to resolve issues and inconsistencies in the tax law, (primarily as they apply to New Zealand portfolio investors - those with under 10 percent ownership interests in companies or other entities), whether those investments occur directly in companies, other entities, or indirectly via intermediaries. It should be assumed that the basic structure of tax laws outside the area of investment will not be altered and will therefore be outside the terms of reference for this work. An across-the-board capital gains tax, taxation of owner-occupied housing and the basic treatment of debt instruments under the accrual rules are not within the terms of reference.

It would be outside the scope of the work for the chair to consider alternatives to the tax treatment of savings that are not consistent with the TTE (tax/tax/exempt) model applied in New Zealand or to consider savings-related concessions. Some related specialist areas, such as the tax rules for life insurance, may be impacted by any options put forward. While it would be useful to note these impacts, in the time available it would not be feasible for the chair to consider the many detailed issues that changes to the tax treatment of savings might involve.

In its broadest terms, the chair should consider options for making the tax law more consistent between direct and indirect investment so as to improve the efficiency and fairness of the taxation of savings and in particular to reduce any tax impediments to the ability of ordinary New Zealanders to save for their retirement.

The objective of this work is to develop options for change that would minimise the extent to which the tax system distorts the way New Zealanders invest (direct versus via an intermediary or via different intermediaries). As far as possible New Zealand resident intermediaries should not face tax penalties compared to direct investment and similar offshore entities New Zealanders might invest in.

In meeting the above objective, any option for change should, as far as possible:

  1. Protect the New Zealand tax base from erosion. Examples include investment in low or no tax jurisdictions, or investment in no or low tax entities in high tax jurisdictions.
  2. Minimise compliance costs for New Zealand investors and the New Zealand savings industry. For example, any requirement for individual investors who are currently not required to file tax returns to start filing such returns would increase compliance costs. Similarly the New Zealand savings industry has expressed concerns regarding compliance costs imposed on them under certain current tax rules.
  3. Minimise the extent to which the tax system penalises lower income savers who may not have the means or the skills to invest directly and for whom employment superannuation is likely to be significant for retirement savings. For example, it would be desirable that those on a low rate of tax are not taxed at a higher rate on their superannuation savings.

It should be noted that the points above may, at times, be contradictory in practice, which is why there is likely to be several options proposed along with their advantages and disadvantages.

Revenue neutrality is not an objective of this work. The government would like to consider the most viable options (having regard to the objective and points (1) to (3) above) identified by the chair, irrespective of their revenue implications. Revenue implications should however, to the extent possible, be identified since these would need to be taken into account in any final decision.

The government considers that the chair should be charged with:

  • Establishing if there is general agreement on whether the objective and points (1) to (3) above are the principal issues in the area of taxation of investment income.
  • Identifying the boundaries that exist in the area of the current taxation of investment income, both domestically and offshore.
  • Ascertaining whether a consensus can be achieved on how to resolve problems associated with these boundaries, in consultation with the New Zealand savings industry and other interested stakeholders.
  • Developing options for reform that are consistent with such a consensus.
  • Identifying the advantages and disadvantages of the options considered.
  • Reporting to the Minister of Finance and Revenue on viable options by the end of October 2004