Major investment income tax reforms welcomed
Revenue Minister Peter Dunne has welcomed the passage last night of law changes reforming New Zealand’s investment tax rules.
"The main purpose of the Taxation (Savings Investment and Miscellaneous Provisions) Bill is to promote greater fairness in the tax rules for all investors. These new rules offer clear solutions to a number of long-standing problems with the investment tax rules," Mr Dunne said
"In particular, it removes the problem of lower-income earners being over-taxed on their earnings through managed funds and the over-taxation of managed funds' investments compared with individuals.
"This is a significant milestone in the lead-up to KiwiSaver next year, because managed funds will be the first investment choice for many thousands of ordinary investors who will be entering the scheme," Mr Dunne said.
"It is important for these investors – many of whom will be new to investment saving – to be taxed at their correct personal tax rate.
"The second part of the investment reforms deals with the taxation of income from offshore portfolio share investments.
"The basis of this reform is that New Zealanders should pay tax on their investment income whether it comes from New Zealand or overseas. The old rules allowed individuals who invested directly in the eight so-called "grey list" countries such as the US and the UK to pay little or no tax in New Zealand on their investment income, because companies in those countries often pay low or no taxable dividends.
"On the other hand, investors in shares in other countries such as India or Singapore have been fully taxed on their income. The new rules remove the bias in favour of investing in certain countries rather than others for tax reasons.
"The new rules will benefit ordinary New Zealanders saving through managed funds by:
- taxing their savings at their actual tax rate – for example, 19.5%, and not 33%;
- making capital gains on Australasian shares tax-free – they are currently taxable if made via a fund; and
- applying the 5% fair dividend rate method to non-Australasian shares – funds are now normally taxed on capital gains plus dividends.
"These changes are important to make KiwiSaver work, because they remove tax penalties from investing in a managed fund.
"In addition to the measures contained in the bill, the Minister of Finance and I recently announced that the KiwiSaver tax exemption for employer contributions will be extended to other registered superannuation schemes. Again, this is a significant step forward in helping New Zealanders to save for their futures.
"This development, together with the new rules for the taxation of managed funds and offshore portfolio investment in shares will make for a much fairer and more consistent set of tax rules for New Zealand investors," said Mr Dunne.
Other tax measures included in the bill are:
- Changes to the employer superannuation contribution rules to ensure employer superannuation contributions are taxed at the correct marginal rate for each employee and to minimise the potential for taxpayers to use excessive "salary sacrifice" as a means of paying less tax.
- Changes to the tax rules on Australian superannuation funds to resolve compliance problems for people who have interests in these funds and to remove an associated potential tax disincentive for skilled people to come to New Zealand to work.
- Changes to the tax treatment expenditure on geothermal wells, to remove uncertainty about the deductibility of capital losses arising from failed wells drilled in New Zealand. The new rules will also allow taxpayers to depreciate geothermal wells drilled or acquired between 1 April 2003 and 16 May 2006 and not yet in service from the beginning of the 2006 income year.
- Changes to the tax exemption on income tax for operational allowances paid to military personnel on specified missions in designated operational areas. The exemption has been extended to apply to similar allowances paid to New Zealand police personnel serving in operational areas.
Contact: Ainslie Fenwick, Tax Advisor, Tel: 04 471 9728