Skip to main content
Inland Revenue

Tax Policy

PUBLISHED 29 March 2006

Investment tax changes in May bill

A tax bill scheduled for introduction in May is expected to introduce changes relating domestic investment through collective investment vehicles and to offshore portfolio investment in shares, Revenue Minister Peter Dunne said today. The government will announce details of the proposed changes over the next few weeks, the Minister told the SuperFunds Summit in Wellington today. For more information see the Minister's speech.

Hon Peter Dunne
Minister of Revenue


Speech to Summit of Superannuation Funds

Hotel Intercontinental, Wellington

I am very pleased to have been invited to speak to your summit today.

I have been asked to update the summit on three matters:

  • the government's proposed changes to the tax rules and how they will affect investment through collective investment vehicles,
  • the status of the review of the taxation of investment,
  • and whether tax changes are required for a level playing ground for investments.

Over the last three or four years you will have heard a lot about proposals for reforming the rules on the taxation of domestic investment through managed funds and the taxation of offshore portfolio investment in shares.

The arguments and counter arguments for change can be highly technical – with talk of things like collective investment vehicles, flow-through, the foreign investment fund rules, the grey list, deemed rates of return and so on, and can generate much heat. The result is a debate that can be difficult for people outside the savings and investment industries to follow.

It is these people, however, who are central to the reform of the tax rules on retirement savings.

They are often ordinary, middle-class people with a family, a house in the suburbs, a mortgage and a hundred competing demands on their discretionary income. They often must struggle to save for retirement, and when they do they probably invest through managed funds rather than invest directly in overseas shares, for which they probably lack experience and confidence.

For all of them, whatever their savings and however they are structured, there is a sense of pride at what they have been able to achieve. They feel they have heeded the message about prudent planning for the future, and they become angry and frustrated if they sense the rules are being changed in a way that disadvantages their decisions.

For many others, though, saving for retirement is still too often put into the "do it tomorrow" basket.

The new KiwiSaver scheme has the potential to turn that mindset around. It will provide a mechanism for ordinary people to save automatically, without having to think too much about it. The aim is to make it as easy to save in the future as it is now not to save at all.

It is obviously essential that the tax rules do not disadvantage investors through KiwiSaver funds over other kinds of investors. More generally, it is also important that the tax rules themselves do not become the driver of particular forms of saving.

At present, however, the rules do create distortions.

People who save through New Zealand managed funds such as superannuation funds and unit trusts are taxed more heavily than people who invest directly.

The reasons for the over-taxation are that managed funds are generally taxed on their realised share profits, and are generally taxed at 33%, although their tax rates could be below 33%.

As you know, the government has proposed new rules to resolve the problem, using the concept of a qualifying collective investment vehicle.

Under the new rules, realised gains on shares in New Zealand companies would not be taxed, and taxable income would flow through to investors in the fund and be taxed at their personal tax rates.

These new rules are necessary if KiwiSaver is to work as intended – and reverse that non-savings mindset. They will prevent low-income people investing through KiwiSaver funds from being over-taxed.

For this reason it will be essential for the CIV rules to come into effect in tandem with the start-up of KiwiSaver, which is 1 April next year.

A basic principle of taxing investment income is that the tax rules themselves should not create investment distortions. Investments should be taxed the same regardless of where the investment is located, and those who invest through intermediaries such as managed funds should be taxed in the same way as those who invest directly.

The current tax rules on investment operate very unevenly. They over-tax some investors, they favour direct investment by individuals over investment through funds, and they favour investment in some countries over others.

What any reform of the rules must do is to right the imbalance, which is very difficult to do because of the competing interests involved. Therefore the government is trying to achieve a reasonable balance between those competing interests.

In achieving a reasonable balance, it is inevitable that there will be winners and losers – the many winners will be those who lose disadvantages, and the losers will be those who lose their advantages.

It most certainly will not be a money grab by the government.

Striking the balance will be expensive and is estimated to cost more than $100 million in lost revenue. That is a cost that the government has chosen to bear – over competing priorities – because it is essential to get the investment rules right.

That is only fair. As I said earlier, in order to save for their retirement, the ordinary couple with a family must find some room in the family budget to give priority to retirement savings.

It is reasonable, therefore, to expect the government to make some room in its Budget to make the taxation of retirement savings fairer. I am completely confident that this will be done.

The government has consulted extensively on its proposals to apply consistent tax rules to different types of investment, including offshore portfolio investments in shares. For the latter, consistency would mean that under the proposals released last year investments into the seven 'grey list countries' would no longer receive a tax preference but would be taxable under more consistent rules.

On the other hand, investment outside those countries, including some of New Zealand's high-growth Asian trading partners, would receive a more reasonable tax treatment than at present.

On the whole, those changes would affect higher wealth direct investors, who at present have a tax advantage over managed funds. The changes would have little effect on managed funds, which are already taxed on their business gains.

Submissions on the discussion document which set out the proposals broadly supported the proposals relating to domestic investment through the collective investment vehicles that I mentioned earlier. All was more or less well with that side of the proposed reform.

The vast majority of submissions, however, and over 800 were received, focused on the offshore proposals and were almost unanimously opposed to changing the tax rules for offshore investment.

Some of the main concerns expressed in submissions were that the changes would tax unrealised capital gains, would advantage funds, would increase tax on investments into Australia, and the rules would be too complex for individuals to comply with.

I will not go into the details of the proposals relating to offshore investment – the next speaker, David Carrigan, will do that. But I do want to assure you that the government is listening to the concerns and has consulted widely, once again, on modified proposals that take account of some of the key concerns that have been raised, while retaining the key policy aim of the original proposals.

One approach would be to treat investments in Australian companies in a similar manner to New Zealand investments. That would result in tax being paid broadly on dividends.

A different approach for Australia could be justified on the basis that, as in New Zealand, Australian dividend yields are reasonable. It could also be justified on the grounds of the Closer Economic Relationship between the two countries.

Officials have now reported to Ministers and we hope to be in a position to announce policy decisions over the next few weeks. A tax bill scheduled for introduction in May is expected to introduce changes relating to domestic investment and CIVs, as well as some relating to the taxation of offshore portfolio investment in shares.

As Minister of Revenue, I am looking for a reasonable, pragmatic solution that produces a fairer result for ordinary families struggling to put that little bit aside to supplement their retirement income.

I accept that although the final package will have many winners, there will also be some losers. That is the inevitable result of bringing more balance to a tax system that is heavily skewed against family retirement savings.

I look forward to being able to be able to give your more information in the near future.

Thank you.